Bloomberg reports Junk Bonds’ Record Sales Leading to Indigestion

Junk bonds are losing momentum as the busiest week on record for sales of the debt and a warning from the Federal Reserve about the outlook for the economy drives up relative borrowing costs.

The extra yield investors demand to own high-yield debt climbed the most in two months as First Data Corp., the credit- card processor acquired by KKR & Co. in 2007 for $27.5 billion, and Detroit-based Ally Financial Inc. led at least $12.9 billion of bonds sold or marketed this week, according to data compiled by Bloomberg.

Sales of the speculative-grade debt, which have climbed for six straight weeks, may be peaking after the Fed said this week that the recovery is slowing, the Bank of England cut its growth forecast and a report showed industrial output in China rose the least in 11 months.

Yield spreads on bonds rated below Baa3 by Moody’s Investors Service and BBB- by Standard & Poor’s climbed 18 basis points yesterday to 678 basis points, or 6.78 percent, according to Bank of America Merrill Lynch index data. That’s the widest since July 20.

First Data, based in Atlanta, and Ally, formerly known as GMAC Inc., were among at least 22 companies that sold or marketed high-yield debt this week, Bloomberg data show. Sales are poised to exceed the previous record of $12.4 billion set during the week ended March 26.

JNK Lehman High Yield Bond Fund

click on chart for sharper image

click on chart for sharper image

Note the correlation between junk bonds and the S&P; 500. The magnitudes are not the same but the direction usually is.

Every time it appears the junk bond market is ready to break down, it instead bounces, with the equity markets following along. How much longer the appetite for junk can remain strong is a mystery. However, somewhere along the line the corporate bond market is going to choke on all this issuance, and when it does, the result will not be pretty for equities.

Mike “Mish” Shedlock
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Whether that time is now remains to be seen.