Beware Junk Energy Bonds Amid Oil Drop, Barclays Warns

Corrected

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."