CNBC - Junk Bond Scare is Rising: 'No One Cares. People are Buying Everything'

February 07, 2020

Article by Jeff Cox in CNBC financial

Even as interest rates remain low and investor appetite is strong, the ever-rising high-yield corporate debt levels are continuing to raise concerns on Wall Street.

The latest warning comes from Charles Schwab strategists, who are advising clients to reduce their exposure, or underweight, to a part of the market that will see a record number of maturities over the next five years.

We think risks are elevated. We are concerned about the level of corporate profits,” said Collin Martin, a fixed income strategist at Schwab who focuses on corporate bonds. “We think too many people are reaching for yield.”

Investors for the past decade-plus have been in a race for yield as the Federal Reserve has kept benchmark rates low and as borrowing costs for corporates, even at the lowest end of the credit spectrum, remain cheap. The ICE BofAML High Yield Master II effective yield is around 5.3%, near the lowest it’s been for the entire recovery cycle and well off the most recent high near 10% in February 2016.

‘It’s a risk’

The easy availability of refinancing is helping low-rated companies continue to revolve their debt and avoid obligations they might not be able to meet.

Investors don’t seem to mind any of it, continuing to scoop up speculative debt regardless of the credit risks. Covenant protection, or the insurance investors get that borrowers have the ability to pay, was near its lowest levels on record at the end of the 2019, according to Moody’s Investors Service.

“It’s a risk, but no one cares,” Martin said. “People are buying everything.”

Ratings companies have been warning about a rising number of “fallen angels” that could slide from investment-grade debt down to junk.

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