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Home>UPDATE: Here's why junk bonds could suffer a big hit

UPDATE: Here's why junk bonds could suffer a big hit

UPDATE: Here's why junk bonds could suffer a big hit

10/02/2017

By Jeff Reeves, MarketWatch

Lack of a big risk-premium is a warning sign

Just about two years ago, in the fourth-quarter of 2015, perhaps the biggest news on Wall Street was the turmoil in the junk-bond market.

A sharp downturn in the price of oil at that time left many energy companies unable to service their debt. Standard & Poor's warned that as much as 50% (http://money.cnn.com/2015/12/10/investing/oil-prices-bond-defaults/index.html) of the energy sector could default, and one MarketWatch writer warned that"it's 2008 all over again." (http://www.marketwatch.com/story/credit-spreads-seem-to-think-its-2008-again-2015-12-22)

Junk-bond funds that had chased this high-yield asset class found themselves in a tight spot. Indeed, Third Avenue's Focused Credit Fund (https://www.nytimes.com/2015/12/11/business/dealbook/high-yield-fund-blocks-investor-withdrawals.html?_r=0) was forced to liquidate and close after the investment vehicle was swamped by redemption requests.

Have you forgotten all that?

Most investors apparently have. After all, junk-bond yields hit record lows (http://www.foxbusiness.com/features/2017/05/11/junk-bond-yields-hit-record-lows.html) in early 2017 on the theory that the "reflation trade" would lift growth and make it easier for companies to pay what they owed. Oil prices have been relatively stable, and a "risk on" market this year continues to keep most folks content

But does that mean investors should continue eagerly buying junk bonds? Or should they prepare for another high-yield credit crisis?

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