The riskiest companies in the world are reaping the benefits of the global search for higher returns, sending the yield on dollar-denominated debt of some of the lower-rated companies close to all-time lows.
The average yield on triple-C-rated US debt in the United States fell to a recent nadir of 7.6% this month, approaching its all-time low of 7.3% set in 2014, according to data from ‘Ice Data Services. Falling yields signal a rise in asset prices.
The rise in the price of bonds issued by the lowest-rated borrowers this year shows how willing investors are to ignore the persistent spread of the coronavirus and a patchy economic recovery.
Instead, investors focused on the aggressive measures deployed by the US central bank last spring, including its decision to start buying corporate bonds, as well as lowering its main interest rate close to zero. Analysts say Federal Reserve actions have supported financial markets and opened the floodgates for companies to borrow money to survive the pandemic.
Fund managers, unable to generate returns by buying safer government securities, piled on corporate bonds, initially opting for higher-rated debt securities. While demand also pushed yields down there, investors gradually turned to lower-rated bonds.
“You basically have a Fed that says ‘We won’t pull the rug no matter how wild it gets,’” said Max Gokhman, head of asset allocation at Pacific Life Fund Advisors.
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This is a dramatic reversal from the sell-off of just under a year ago, which saw yields on triple-C-rated debt peak over 19%.
Even the companies worst hit by the Covid-19 crisis managed to issue debt this month: Life Time Fitness issued a $ 475 million bond and Viking Cruises a $ 350 million bond
“The tone of risk continues into the new year,” Citi analysts noted this month.