Beware Junk Energy Bonds Amid Oil Drop, Barclays Warns

Corporate Bonds Spark Investors' Credit Market Appetite

High-yield energy bonds, which have risen even as oil slid more than 20 percent in the past two months, may be hit if the commodity dips below the $40 it’s trading at now, according to Barclays Plc strategist Brad Rogoff.

“That portion of the high-yield market especially, it looks a little rich with crude at $40," a barrel, Rogoff, head of global credit strategy research at Barclays Capital, said Monday on Bloomberg TV. "If we drop below, you’ve probably got some downside there."

High-yield energy bonds are on track for their best returns since 2009, with oil recovering from a 13-year low of $26.21 a barrel in February. After rising to $51.23 in June, crude dipped back under $40 on Monday. With that drop, the correlation between speculative-grade bonds and the oil price is at its weakest level since at least 2010.

In U.S. investment-grade corporate bonds, Rogoff said investor demand was outstripping companies’ need to borrow. That demand will keep even cash-flush companies like Apple Inc. seizing the opportunity to issue low-cost debt, Rogoff said.

“The average yield for investment grade right now is 2.75 percent," Rogoff said. "It’s really tough to not want to take advantage of that."

(Corrects chart to show the Bloomberg USD High-Yield Corporate Energy Bond Index.)
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