By Joy Wiltermuth
Prices on speculative grade or “junk” rated U.S. corporate bonds tumbled on Thursday after 10-year Treasury yields spiked, ratcheting up concerns that a steeper market selloff could be afoot.
A key catalyst for the tumult has been a quick surge in benchmark Treasury rates /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y 0.00% , which hit a one-year high of 1.513% on Thursday — and worries of a significant march higher.
“I don’t think it is panic,” said John McClain, a high yield portfolio manager at Diamond Hill Capital Management, adding that highflying technology stocks have sold off more sharply than corporate debt.
But McClain said investors have grown a bit more cautious and high-yield companies could take a pause from pricing deals for a few days to wait out the turbulence.
Only a handful of U.S. high-yield names traded in the green Thursday, according to BondCliq data, including C-rated bonds issued by “meme stock” company AMC Entertainment Holdings Inc. /zigman2/quotes/200235402/composite AMC -5.76% and BB- debt issued by Twitter Inc . /zigman2/quotes/203180645/composite TWTR -2.22% .
This chart shows high-yield’s most active bonds on Thursday, underscoring the bulk of the debt was under pressure.
The most liquid part of the corporate bond market is exchange-traded funds (ETFs) that have exposure to the sector, which often are the first thing investors sell if they need, or want, liquidity.
On Thursday, the $9.2 billion SPDR Bloomberg Barclays High Yield Bond ETF /zigman2/quotes/202941311/composite JNK -0.20% closed 0.9% lower, while the $22 billion iShares iBoxx $ High Yield Corporate Bond ETF /zigman2/quotes/204471305/composite HYG -0.21% fell 1% as the major U.S. stock indexes sold off more sharply .
McClain said high-yield companies could become more reluctant to issue longer-dated bonds that mature in a decade or longer, after the 10-year Treasury yield jumped about 15 basis points in the past two days.
“If Treasurys rise from 150 basis points to 200 basis points, or 200 and above, that will be meaningful,” he said.
Corporate bonds are priced at a premium, or spread, above risk-free Treasurys that is based on sentiment and credit risks, such as losses stemming from a borrower’s missed payments, defaults or bankruptcy.
U.S. high-yield spreads rose to a 10-year high of 1,009 basis points over Treasurys during last March’s pandemic-induced selloff, but were last spotted closer to 347 basis points.
“Until recently, market participants have been able to digest the upward drift in long-term rates, but it appears that the next leg up in interest rates is a bigger bite to chew,” Charlie Ripley, senior investment strategist at Allianz Investment Management, said in emailed commentary.
“Looking at where real yields were at, they were simply too low when considering growth expectations, and it’s likely that long-term real yields will continue to drift higher as economic data improves.”