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Investors Seek Out Riskiest Junk-Rated Bonds

Investors’ rush into the lowest-rated junk debt has driven yields to record lows, reflecting Wall Street’s thirst for fixed-income returns and increasing confidence that even struggling businesses can survive the pandemic.

The yield on an index of triple-C rated corporate bonds settled Thursday at an all-time low of 6.42%, according to Bloomberg Barclays data. That was down from 7.4% entering the year. Yields fall when bond prices rise.

Record-low yields for the worst-rated bonds mark a reversal after pandemic shutdowns fueled a selloff in riskier debt less than a year ago. Back then, investors expected many struggling companies to go bankrupt or default. Credit markets froze, driving yields to recent postcrisis peaks, particularly for low-rated firms.

Actions by the Federal Reserve, including cutting interest rates and buying billions of dollars worth of bonds, helped fuel a recovery in corporate debt. With interest rates near zero, investors have ventured into riskier assets, including junk-rated corporate bonds, in search of higher yields. That has helped many struggling companies refinance their debt at lower interest rates.

Now, the prospect of vaccines and a return to economic normalcy are powering a recovery in the lowest-rated junk debt, a market made up of companies particularly sensitive to the economy’s direction. Triple-C rated corporate bonds have so far returned 2.2% to investors in January, according to Bank of America, outpacing gains on higher-rated corporate bonds and leveraged loans.

“There is not even a remotely close historical comparison to the degree of improvement in credit-market conditions to what we have witnessed here,” wrote the bank’s analysts in a recent note. At recent levels, the high-yield market is implying a default rate of 2.1% over the next 12 months, they added, below what many feared entering 2021.

One thing still attracting investors: the additional yield, or spread, that the lowest-rated junk bonds pay out over benchmark U.S. Treasurys. On Thursday, investors were getting an extra 5.77 percentage points to hold triple-C corporate bonds instead of Treasurys, according to Bloomberg Barclays data. That compares to 3.43 percentage points for junk bonds broadly.

Many companies are taking advantage of investors’ demand to sell new debt. High-yield companies have raised more than $33 billion so far this year as of Thursday, according to S&P Global Market Intelligence’s LCD. That is a roughly 55% increase over the amount raised during the same period in 2020.

Triple-C-minus rated hospital operator Community Health Systems Inc. sold more than $1.7 billion worth of junior priority bonds this week at a 6.756% yield. Outsize demand for the offering allowed the company to more than double the initial $750 million size of the sale, while cutting the initial yield offered.

Community Health’s newly issued bond due 2029 finished trading Friday at 102.25 cents on the dollar, according to MarketAxess, implying a 6.354% yield.

Bonds tied to triple-C-plus rated NGL Energy Partners LP rallied to pandemic-era highs after the company announced a $2.05 billion bond sale on Thursday intended to repay debt that was coming due.

NGL’s $425 million bond due 2026 settled Friday at 80.25 cents on the dollar, according to MarketAxess, implying a 12.795% yield. That was up from 73.97 cents on Jan. 19.

Write to Sebastian Pellejero at sebastian.pellejero@wsj.com

Copyright ©2020 Dow Jones & Company, Inc. All Rights Reserved.
Appeared in the January 23, 2021, print edition as 'Investors Seek Out Riskiest Junk Debt.'
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