Investors pulled nearly $1.9 billion from funds dedicated to
low-rated corporate bonds in the past week, extending a retreat from risky debt
amid a free fall in the price of crude oil. The outflow is the largest weekly
decline since the $2.3 billion withdrawal registered in the week ended Oct. 1,
and follows $859 million that flowed out the week ended Dec. 3, according to
fund tracker Lipper.
Tremors from the slide in oil prices that initially hit
energy bonds are now being felt across the broader $1.3 trillion junk-bond
market, investors and analysts said, causing hesitation among would-be buyers
and a hurried reshuffling of bond portfolios as funds look to raise cash to
meet redemptions.
Investors are selling junk bonds at the fastest clip in 18
months, according to data from Barclays PLC, and many are worried the
upheaval could become a catalyst for more lasting weakness in high yield,
particularly if growth slows or individual investors get spooked and see a
reason to pull more of their money.
The selling constitutes the third major reassessment of
junk-rated debt this year and follows criticism from analysts and regulators
that the yield investors could earn on the debt had fallen too low. Previous
retreats in July and in mid-October were characterized by large-scale selling
as individual investors pulled their money, leaving large institutions to buy
the debt at deep discounts.
The risk for junk-bond buyers is that the market continues
to stumble and many of those investors remain wary of stepping in too early, in
case the market registers another big decline.
The oil rout has put a dent in issuance volumes, causing a
handful of energy companies to delay or cancel their borrowing plans. The
issuance boom had helped a host of energy companies fund their business plans
by borrowing heavily on the back of investor demand for higher yielding debt.
Energy companies used the reach for yield among debt investors to line their
pockets for new projects, equipment and acquisitions. But those energy bonds
were sold when commodity prices and energy stocks were riding high, implying
more favorable economics for the energy industry. U.S. oil prices hit $59.95 a
barrel on Thursday, the lowest since July 2009.
The drawdowns signal a growing wariness about owning risky
debt, following a slide in oil prices that has left investors worried about
energy’s trickle-down effect on the economy. Energy bonds constitute 14% of the
U.S. high-yield bond market.
This week, even nonenergy high-yield bonds have been hit as
investors rushed to sell whatever debt they could to raise cash. Goldman Sachs
Group Inc. is forecasting further downside in prices and lingering price
volatility.
It is a bad time to see weakness in high yield: Dealer middlemen,
who traditionally cushioned any selling pressure, have been re-evaluating their
willingness to buy and sell bonds for their clients since the financial crisis
and they have been especially reluctant to step in around year-end, raising
costs for investors trying to complete trades.
In the week following bond market tumult on Oct. 15, dealer
stockpiles of high-yield corporate bonds called “inventories” dipped below
one-fifth of their average for the year, according to data from the Federal
Reserve Bank of New York.
Investors are now demanding 5.02 percentage point over
comparable Treasurys to own U.S. high-yield corporate bonds, the widest spread
since June 2013, after the Fed hinted it may raise interest rates sooner many
were expecting. But some believe the panic is overdone. Mr. Sherman said he has
been reducing his fund’s exposure to the energy sector all year but that the
prices in the market are “starting to get interesting” enough to tempt him to
buy again.
Morgan Stanley strategists predict that investors will
continue to reach for yield in 2015, benefiting junk bonds. The firm said in an
outlook piece for next year that it had been cautious on the debt for most of
2014 because it felt prices had run too high, but that “given recent
volatility, sentiment is much less complacent.”
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