Oil sell-off puts pressure on US junk energy bonds

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The risk premium investors demand to hold the debt of riskier US energy companies has climbed to the highest level since early January amid the sharp decline in the price of oil this week.

The spread on the debt of junk-rated borrowers climbed on Wednesday to 4.37 percentage points, up by 11 basis points from Tuesday and the highest level since January 3, according to Bank of America Merrill Lynch data. It had fallen as low as 4.03 percentage points on January 27.

Spreads gauge the difference in yield between corporate bonds and safe-haven Treasuries of the same duration – with wider spreads implying a greater risk premium.

Meanwhile, yields on energy bonds which carry a rating of double-b plus and below hit 6.45 per cent, the highest level since late December.

The rise in yields and spreads comes as oil prices suffer renewed selling pressure, with West Texas Intermediate, the US benchmark, declining by 7 per cent since last week to $49.60 a barrel.

The sell-off in crude has also dragged shares in US energy companies lower, with the S&P 500 energy sector down by 0.7 per cent in early trading on Thursday. It has fallen 3.8 per cent on a week-to-date basis.

While spreads have moved higher, they still remain far below the peak of more than 19 percentage points that was hit early last year amid intense tumult in the energy market that sent the price of US crude oil falling as low as $26.05 a barrel.

Lowly-rated US energy groups are considered to be particularly sensitive to the price of oil since many have taken on debt in order to drill for oil.

With prices having stabilised around $50 a barrel, the outlook among many producers has brightened. However, concerns over growing supplies have begun to increase, with US inventories rising last week to a record high.

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