Investors rushed to sell US corporate bonds on Thursday as Ben Bernanke’s comments that the Federal Reserve may start paring down its aggressive stimulus measures sparked a broad exodus from what has been one of the hottest assets in the past year.
The selling was indiscriminate, hitting companies with strong credit quality and fragile balance sheets alike.
But sharper moves were felt in the riskiest corners of the US fixed-income markets, with debt from companies with ratings deep into junk territory - CCC and below - or with lower coupons, such as Chesapeake Energy, Ball Corp and Cinemark, suffering the most, according to S&P LCD.
The price on iShares iBoxx High Yld Corp Bond, the largest junk bond exchange traded fund, fell 1.5 per cent on Thursday to $90.28, its lowest level in a year.
The selling would continue over the next couple of days, analysts said. Junk bonds are particularly vulnerable to sharp price swings as higher risk-free rates could remove the incentive for investors to reach to riskier debt to earn yields, a powerful force that has pushed junk bonds higher in recent years.
In addition, given the frenzied nature of the rally earlier this year, yields on junk bonds no longer provided adequate compensation for the risks of potential defaults, they said.
“All these people who lined up to buy high-yield bonds, only looking to get that extra yield and not paying much attention to the credit quality of these companies, are now just trying to get out,” said Adrian Miller, director of fixed income strategy at GMP Securities.
The sell-off took place as benchmark US Treasury rates jumped, sending the yield on the 10-year note to as high as 2.47 per cent, its highest level since August 2011. It also represents an important reversal after a bullish start to the year.
A pronounced rally pushed tields on high-yield bonds to all-time lows by mid-January, as global companies sold a record amount of the securities.
But average yields for junk bonds have climbed to 6.13 per cent. That is up from a record low of 5.61 per cent on January 24, according to data from Barclays. Yields on investment-grade bonds rose 17 basis points this week to stand at 3 per cent.
Late on Thursday, Lipper said investors had pulled another $508m from bond mutual funds and exchange-traded funds in the week ending on June 19 amid expectations a rise in benchmark rates would hurt the value of fixed income holdings.
Most of the redemptions, or $333m, came from funds investing in junk bonds, which had already experienced massive outflows at the start of the month. The numbers have yet to reflect Thursday’s broad sell off.
Still, Michael Collins, senior investment officer for Prudential Fixed Income, said high-yield bonds still offered potentially attractive returns to investors. But prices on the securities had not fallen enough yet to bring in a new wave of buyers.
“I wouldn’t bail completely on high-yield,” he said. “At one point, this sell-off becomes a great buying opportunity. We are just not there yet.”