Bloomberg
Bond investors are taking increasingly risky bets in return
(Bloomberg) – Bond investors, encouraged by a recovering economy and global vaccine issuance, take a greater risk, sometimes a much greater risk. Insurers, pension systems, and high-quality credit managers in the United States and Europe are buying up larger amounts of junk-rated debt to offset shrinking yields, forcing high-yielding investors to push for BB-rated bonds. and most of its class with 60% of the market. Some fund managers accustomed to choosing speculative-grade bonds have seen their orders for new bonds in recent months, they said, refusing to be identified because the information is private. A high-yield fund manager said his orders had been reduced by about 15%. Growing demand has reduced profitability to record lows, pushing investors to more subordinate parts of the company’s capital structure. This is a good idea for companies that want to raise money, as borrowing costs are reduced and even those with the highest risk can get a loan and sometimes increase their sales. “The market is hot and this is forcing investors to look at opportunities more broadly because of how tight things are,” said John Cortese, co-chair of US credit trading at Barclays Plc in New York. “The traditional high-yielding investor, who wants to get a 5% -7% yield, considers the higher-yielding parts of the credit markets”, such as CCC-rated bonds, private loans and even secured loan obligations, garbage packages packaged in pieces with different risk and return. Investors are accumulating speculative debt to bet on what they expect to be a raging global economy in the second half of 2021 as more people are vaccinated. The US gross domestic product is expected to grow by 6.1% this year, according to the latest monthly survey of economists from Bloomberg. This would be the highest growth rate since 1984. Forecasts of the death of Covid-19 and other indicators of a pandemic have improved in recent weeks, although options and slower vaccine introduction into the European Union complicate the picture. This optimism has suppressed US junk bonds. The average yield on dollar-denominated CCC-rated bonds, the last credit rating before default, was 6.1% on Friday, the lowest recorded. In Europe, CCC yields reached 5.8%, the lowest since 2017 and a whopping 19% at the height of last year’s pandemic. “The issue with high returns overall is that valuations are still quite stretched on a historical basis,” said Matt Brill, head of investment class for North America at Invesco Ltd., a $ 1.4 trillion asset manager. “You think you’re getting a really interesting, attractive opportunity, and yet it only gives 3.5% to 4.5%.” Contrary to his usual strategy, Brill says he immerses himself in unnecessary BB bonds with funds that are usually used for high quality debt. As a result, traditional high-yield investors had to look even harder for investment opportunities. Mark Benbow, a high-yield fund manager at Aegon Asset Management in the UK, said he was withdrawing from the BB loan in the middle of last year. “Our strategy is now getting bigger for short-term debt with high coupons, so we need to look at more risky names,” Benbow said. Currently, only 24% of its fund has debt with a BB rating, compared to 60% in 2017, and it has increased its exposure to CCC credit. A little up Some investors worry that garbage is valued to perfection. Central banks currently support financial markets with low interest rates and easy monetary policy. The European Central Bank said on Thursday it was stepping up its emergency bond-buying program, another support for economic recovery. But rising government bond yields, boosted by rising inflation forecasts, mean the mood could turn around quickly. For those who are burdened with riskier debts, the chances of losses are much greater. “With spreads and yields, as narrow as they are and the lack of market spread at the moment, there are very few ups and downs if you don’t plan things,” said Jeff Mueller, London-based co-director of high-yield bonds at Eaton Vance, who helps manage $ 486 billion in assets. The Bank of America preached cautiously in a note to customers last week, saying that buying corporate bonds from investors seeking to take advantage of the recovery after the pandemic has made some parts of the market look “seductively stretched.” Still, the pressure to buy riskier debts is relentless, aided by rising junk from pension funds and insurance companies, usually more conservative investors. These institutions are increasing their orders for BB-rated bonds by up to 30% compared to last year, according to a source. Regulatory documents show that insurance companies, including Manulife Financial Corp. and Allstate Corp., are among the largest holders of CCC-rated bonds of Carvana Co., issued last fall. Carvana, a used car dealer, never reported a quarterly profit. In Europe, insurance funds are buying significantly larger portions of new junk bond issues than last year. US pension funds are also looking for high-yield debt. The California Civil Service Retirement System and the Kentucky Public Retirement Authority purchased 11.75 percent of American Airlines Group Inc.’s junk issued amid pandemic uncertainty last summer, according to their annual reports. The borrowers who take advantage of this hunger for profitability are who has which of the companies with problems. German retailer Douglas GmbH recently raised 2.4 billion euros in refinancing, with investors ignoring declining sales and closed stores. A Douglas spokesman did not respond to an email or voicemail requesting comment. In the United States, CEC Entertainment Inc., a parent of Chuck E. Cheese, issued $ 650 million in junk bonds in April, less than four months after it went bankrupt. Moody’s Investors Service assigns a Caa1 rating to the bonds, placing them at the riskiest level, and notes “very high debt leverage and weak same trends in store sales.” Investors were unhappy with placing so many bond orders that the CEC increase sales reduce interest payments to 6.75%. The bet is that the decline is still far away. “We probably have two to three years before we start seeing the traditional default cycle,” Ares Management Corp. CEO Michael Arugeti said during a virtual event on Bloomberg News earlier this month. (Updates with comment comment in paragraph 12.) For more articles like this, please visit us at bloomberg.com Subscribe now to stay ahead with the most trusted source of business news. © 2021 Bloomberg LP