The equity market sell-off and rising volatility have made global headlines. At the other extreme, interest rates have rallied to historic lows, driving bond prices markedly higher. In between stocks and government bonds sits the junk bond universe.
Below investment grade rated corporate bonds, or junk bonds, offer a spread premia over similarly matched Treasuries. Over long time intervals, this credit spread has offered investors ample compensation for the higher default risk of corporate bonds. Junk bonds offer investors higher returns than government bonds, but come with higher risk. In periods where the economy weakens, high yield bonds typically underperform as concerns mount about whether levered issuers will be able to service and refinance existing debt.
Below investment grade bonds are also senior in a company's capital structure to the equity. Because of this seniority, corporate bonds, even those of speculative grade companies, have less price variability than the company's equity. On the return spectrum, and over long time intervals, high yield corporate bonds will outperform Treasuries, but underperform equities. On the risk spectrum, high yield bonds will usually be more risky than similar duration government bonds, but more safe than equities.
High yield bonds tend to follow the macro headlines, and not lead the way. That does not mean that they have not been of interest during the recent tumultuous market environment.
Below are ten facts on the high yield corporate bond market that should help investors frame the recent moves in this credit-sensitive fixed income market:
- Monday's spread sell-off was the largest single-day move since October 2008 during the depths of the financial crisis. Spreads widened 92bp from 550bp over Treasuries to 642bp.
- The sharp widening was driven by both the broader risk-off tone (equities down 7%), and an acute pressure in the Energy subsector, which makes up
