Junk bonds are headed for their first monthly loss in a year as dealers take on more of the debt amid rising yields and a record pace of issuance.
Dollar-denominated speculative-grade bonds have declined 0.3 percent in May after returning 15.4 percent the previous 11 months, according to Bank of America Merrill Lynch index data. The 21 primary dealers that do business with the Federal Reserve boosted positions in the debt by $2.7 billion in the three weeks ended May 22 to $8.35 billion, Fed data show, as companies sold $44.1 billion of the debt, an unprecedented pace for the period.
The losses are prompting a pullback by investors from funds that buy junk debt. High-yield funds in the U.S. reported $875 million of withdrawals this week, the biggest outflow since February, according to Lipper Data, as concern mounts that rising interest rates will eat into the notes’ value. Yields on 10-year U.S. Treasuries have climbed 0.49 percentage point in May to 2.159 percent at 11:03 a.m. in New York, the biggest monthly increase since December 2010.
“Risk assets remained volatile, driven by the selloff in Treasuries,” Barclays Plc strategists Jeffrey Meli and Bradley Rogoff wrote in a report today.
While the extra yield the debt pays over government bonds typically cushions bondholders from losses resulting from rising benchmark borrowing costs, a 129-percent rally since 2008 has shrunk spreads by 1,389 basis points to 423 basis points on May 9, the lowest since October 2007, Bank of America Merrill Lynch index data show.
High-yield, high-risk bonds, graded below Baa3 by Moody’s Investors Service and lower than BBB- at Standard & Poor’s, have lost 0.5 percent since May 28, when 10-year Treasury yields reached 2.17 percent, the highest level since April 2012.
Primary dealers led by JPMorgan Chase & Co. and Bank of America Corp. boosted their exposure to speculative-grade notes by $630 million in the week ended May 22 following a $1.37 billion increase in net assets the week before, Fed data show.
Companies have sold $192.9 billion of the debt in the U.S. this year, more than the $140.7 billion sold by this time in 2012, when an unprecedented $358.5 billion of junk debt was issued.
While the notes declined this week, “high yield is better positioned to absorb a rate increase as long as it is accompanied by at least a moderately improving macroeconomic environment,” the Barclays analysts said in the report today.