Are Wall Street’s fixed income underwriters inflating their sales figures ahead of a potential rate hike by the Federal Reserve later this month?
It sure seems like it, because junk bond issuance soared to $26 billion in November –- more than double October’s levels, according to Bloomberg data. Junk bonds, also known as “high yield debt,” carry a credit rating of BB or lower by Standard & Poor’s or Ba or below by Moody’s. Over the past few years, there’s been a boom in high yield debt issuance.
Since 2010, a whopping $1.97 trillion in newly created high yield corporate debt has been issued, according to Dealogic data. High risk borrowers have clearly taken advantage of low borrowing rates while yield hungry investors have snapped up the debt in search of higher yields.
The SPDR Barclays High Yield Bond ETF (JNK) carries an SEC yield of 7.10% while the more conservative iShares iBoxx Investment Grade Bond ETF (LQD) is at 3.59%. Despite its higher yield, however, JNK has underperformed LQD by more than 6%. Over the 12 months through December 3, JNK lost 4.73% while LQD gained 1.34%.
The current spread or difference between lower and higher quality debt is about 6.5%, down from as much as 9.45% previously, suggesting that bond investors are getting more selective about the credit quality of the fixed income they’re buying. (Although junk bonds command higher yields versus investment grade debt, they also come with higher default risk.)