'Magnificent Seven,' meet the 'Junk Bond Five' spurring the rally in distressed debt

By Joy Wiltermuth

These five junk bonds are fueling a rally in distressed debt, despite Fed hints of more rate hikes

"Magnificent Seven," meet the "Junk Bond Five."

The stock market isn't the only place where a handful of companies are driving powerful gains. It's happening too in distressed high-yield, or "junk bonds."

Debt issued by Altice USA Inc. (ATUS), Carvana Co. (CVNA), Community Health Systems Inc., (CYH) Lumen Technologies Inc. (LUMN) and Rackspace Technology (RXT) have been punching up the overall performance of distressed corporate debt.

Gains in their bonds accounted for about two-thirds of the rally seen in the past week within the CCC-rated category of distressed debt, according to BofA Global.

Drilling down, BondCliQ charted performance for the five junk-bond issuers over the past 10 days, with Community Health System's bonds seeing the bulk of the trading action.

"The picture of super-concentrated returns is the same if the time horizon is extended to the last 2wks and 3wks," Oleg Melentyev's team at BofA wrote, in a Friday client note.

The ICE BofA US High Yield Index spread was last pegged at 4.21%, down from a 5.2% peak for the year in March, as fears of a spiraling regional banking crisis were running high.

Bond are priced over a spread above the risk-free Treasury rate to help compensate investors for default risks.

Aggressive Federal Reserve interest rate hikes since last year have been met with climbing corporate defaults in 2023, mostly by riskier companies that binged on cheap and abundant floating-rate debt during the pandemic.

See:Leveraged loan defaults hit $25 billion, head for third worst year in history, says Goldman

DoubleLine's Jeffrey Gundlach recently warned of signs of "mania" in the stock market as seven big technology stocks help drive the S&P 500 index to its near 15% gains in 2023.

Gundlach also said the Fed should stop raising rates, even though it has two more increases penciled in that would bring benchmark borrowing cost to a range of 5.5%-5.75%, or risk triggering a painful recession.

Back in junk-bonds, investors appeared less concerned in the past week about the distressed segment of the market.

"Within CCCs, 70% of all gains were driven by the distressed segment," Melentyev's team wrote."

Carvana shares were up 434% on the year to $25.32 on Friday, while those of Altice, Community Health Systems, Lumen and Rackspace Tech were trading below $5 a share, according to FactSet data.

Read next:How U.S. financial markets have performed in the past 15 months as Fed rate hikes fueled wild swings

-Joy Wiltermuth

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06-19-23 1411ET

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