Cracks In Junk-Bond Market Form As BofA Sees Outlook Darkening

Junk-bond investors who’ve been enjoying more than six straight years of gains fueled by easy-money policies may soon find their streak nearing an end.

After the three strongest years on record for issuance and annual returns of 15 percent since the start of 2009, there are growing signs of trouble in high-yield debt.

For every speculative-grade company that has had its credit rating upgraded this year, about two others have been downgraded -- the worst ratio since 2009. U.S. high-yield companies posted two consecutive quarters without earnings growth for the first time since the financial crisis. And their average level of debt-to-earnings is at an all-time high.

All of this is creating what Bank of America Corp., the second biggest underwriter of the notes, sees as a grim outlook for investors because companies have left themselves little room for error to withstand an interest rate hike just as the Federal Reserve is considering such a move.

“The conditions are the worst since the crisis and therefore outlook is the worst since the crisis,” Michael Contopoulos, the head high-yield strategist at Bank of America, said in a telephone interview. “The longer-term prospects for the asset class are worrying.”

No Growth

Junk bonds lost 1.52 percent last month -- their worst month since September, according to Bank of America Merrill Lynch indexes. The losses wiped out the quarter’s gains, putting the returns at 2.5 percent for the year. Contopoulos forecasts returns as low as 2 percent for 2015.

“It’s one of the few asset classes that have done O.K., but right now it’s looking a little bit ‘meh’,” Jack Flaherty, a money manager in GAM Holdings AG in New York, which oversees $127 billion, said in a telephone interview.

High-yield companies posted zero growth in earnings before interest, tax, depreciation and amortization in the first quarter of this year, according to Bank of America. That’s after earnings slipped 0.06 percent in the fourth quarter of 2014 -- just the second time ever that the measure has fallen along with the first three months of 2013, Contopoulos said.