Junk-Bond Rout Spurs Record $7.1 Billion Outflow: Credit Markets

Aug 08, 2014 6:21 am ET

(For more credit-market news, click on TOP CM. To be sent is column, click SALT CMW.)

Aug. 8 (Bloomberg) -- Funds that buy U.S. junk bonds suffered their biggest withdrawal on record as the first monthly loss for the securities in almost a year fueled anxiety that the market’s gotten too frothy.

Investors pulled a record $7.1 billion from the funds in the week ended Aug. 6, accelerating a flight that started last month and bringing net outflows to $9.75 billion this year, according to data provider Lipper. The exodus followed a 1.3 percent loss for U.S. junk bonds in July, the first monthly decline since last August, according to Bank of America Merrill Lynch index data.

“If you’re holding high-yield bonds and all of a sudden they’re falling like a rock and you don’t see an obvious reason why they should be, you’re response is to get out,” said Martin Fridson, a money manager at Lehmann, Livian, Fridson Advisors LLC who warned in July that the high-yield bond market had been “extremely overvalued” for nine straight months.

Investors are pushing back against the riskiest corporate borrowers after buying unprecedented amounts of their debt to boost yields that have been suppressed by central bank stimulus. That’s crimping a record pace of junk-bond sales and souring demand for speculative-grade corporate loans, where the biggest spree of acquisitions since 2007 is being financed.

Sales Chilled

The withdrawal from junk-bond funds in the last week surpassed the $4.6 billion that was pulled in the period ended June 5, 2013, Lipper data show. Investors also withdrew $1.5 billion from U.S. funds that buy leveraged loans, the largest weekly outflow since $2.1 billion in the period ended Aug. 17, 2011, according to Lipper. That brings this year’s loan-fund net outflows to $2.3 billion.

Sales of speculative-grade bonds are off to the slowest start to a month since July 2013, with $640 million of issuance in the U.S., according to data compiled by Bloomberg. Companies issued $227 billion of the debt during the first seven months of the year, on pace to surpass last year’s record $346.7 billion of sales.

Jupiter Resources Inc. postponed a $1.13 billion debt offering this week that it planned to use for its purchase of natural gas assets in Alberta, Canada. The company is backed by funds that are managed by affiliates of private-equity firm Apollo Global Management LLC. Drew Benson, a spokesman for Credit Suisse Group AG, which was leading the offering, declined to comment.

Nervous Markets

“There’s a lot of nervousness in the market,” said Bonnie Baha, director of global developed credit at Los Angeles-based DoubleLine Capital LP, which manages about $53 billion. High- yield debt has made a lot of money for a lot people and now some may be taking chips off the table.’’

Speculative-grade bonds in the U.S. have gained 145 percent since the end of 2008, when the Federal Reserve lowered its short-term interest-rate target to almost zero and started an unparalleled campaign to spur the economy out of the worst recession since the Great Depression.

Yields on the debt, which reached a record low 5.69 percent in June before rising to 6.2 percent yesterday, have dropped from 22.7 percent in December 2008, according to the Bank of America Merrill Lynch U.S. High Yield Index. The extra yield, or spread, investors demand to own the bonds instead of government debt has widened to 4.2 percentage points from 3.35 percentage points on June 23.

Leveraged Loans

Average prices on leveraged loans reached the lowest since April 28 today, falling to 98.07 cents on the dollar, according to the Standard & Poor’s/LSTA U.S. Leveraged Loan 100 Index. The debt has lost 0.23 percent this month after tumbling 0.25 percent in July for its first monthly loss since August of last year.

Leveraged loans and high-yield bonds are forms of corporate debt rated below BBB- by S&P and lower than Baa3 by Moody’s Investors Service.

“Investors are starting to realize the market may have reached a level of frothiness such that not every bond is an attractive play,” Jody Lurie, a corporate-credit analyst at Janney Montgomery Scott LLC in Philadelphia, said in a telephone interview. “I think they’re saying, ‘OK, we had our fun, let’s not tempt fate.’”

--With assistance from Adam Janofsky, Matt Robinson and Sridhar Natarajan in New York.