We may have reached “the top of the post-Lehman boom in corporate credit”, says Ambrose Evans-Pritchard in The Daily Telegraph. “The bubble has been astonishing”, with junk-bond yields falling to record lows (reflecting rising prices) as investors indulge in a desperate search for yield. The yield on one key gauge, the Bank of America Merrill Lynch Euro High Yield index, which tracks euro-denominated sub-investment-grade corporate paper, fell from 20% in 2009 to a recent 2%. That’s lower than the US ten-year Treasury yield, the benchmark safe-haven asset for the world.
Now the bubble is hissing air. On Wall Street the yield on a widely watched junk index has risen by 0.4% to 3.8% in a fortnight. Last Friday the biggest exchange-traded fund (ETF) for junk, BlackRock’s iShares iBoxx $ High Yield Corporate Bond ETF, slumped to a seven-month low. Another high-yield ETF saw its biggest daily outflow in five years. Last Thursday electricity group NRG Energy and coal producer Bowie Resources Partners abandoned debt offerings. Firms are no longer as confident as they were of selling their debt at a good price.
So what’s gone wrong? Several little pins appear to have pricked the bubble. One is jitters over recent earnings at some issuers, with telecoms and healthcare firms disappointing. The tax reform working its way through Congress, meanwhile, involves closing some loopholes and reducing some incentives. The tax deductibility of interest is set to be capped, which bodes ill for firms with high debt burdens – most of the junk universe, in short. Meanwhile, analysts have gradually become more bearish on junk as the global economic cycle has matured and interest rates have fallen through the floor.
The latest slump in junk is a mere slip given the long years of price rises. But it may be worth keeping an eye on because the credit markets “have sharp antennae”, as Evans-Pritchard notes. Market history shows that while there have been several false alarms, they tend to provide an early-warning sign of a broader market downturn that encompasses other assets, too. Bear in mind there have been other recent straws in the wind that could point to a significant change.
Bitcoin has slumped by a quarter, while some London flotations have had to cut their prices (see page 11). There has even been a foreclosure on Billionaires Row, “the ultra-posh condominium tower” in New York, adds Randall Forsyth in Barron’s. There is still more than enough global liquidity to prop up assets everywhere, so a sudden slump is unlikely. But the peak of the post-crisis party could now be in the past.