Price swings in junk bonds are widening, diverging from stocks that are the least volatile in more than five years as concern mounts that the eight-month rally in the debt is coming to an end.
A measure of 30-day volatility in relative yields of U.S. speculative-grade corporate bonds almost doubled to 20 last week from a record-low of 10.5 at the end of December, according to data compiled by Bloomberg. That compares with a 32 percent decline this year in the VIX index, a benchmark for expected stock-market volatility, to 12.3 on Feb. 19, the lowest since April 2007.
Wider price swings and waning demand has suppressed junk- bond sales as investors, earning yields near last month’s unprecedented low of 6.4 percent, brace for the potential of rising interest rates that can erode the value of the securities. Federal Reserve minutes released yesterday showed policy makers divided over Chairman Ben S. Bernanke’s bond- buying program that is holding down interest-rate benchmarks.
“You do have some catalysts for volatility in credit that may be a little less dramatic for equities,” said Stephen Antczak, a credit strategist at Citigroup Inc. in New York. “The sensitivity to rising interest rates has a very big impact in total returns in credit.”
Issuance Cools
Speculative-grade borrowers sold 34 percent less debt in the U.S. in the two weeks ended Feb. 15 compared with the previous two weeks, Bloomberg data show.
Junk bonds, which gained 11.7 percent in the eight months ended Jan. 31, are up 0.1 percent this month, the lowest return since losing 1.2 percent in May, Bank of America Merrill Lynch index data show. The performance is showing how unstable the market is becoming at current prices, said Oleg Melentyev, a credit strategist at the bank.
The average junk-bond price has declined 1.1 cent from the high of 105.9 cents on the dollar reached Jan. 25, Bank of America Merrill Lynch index data show. The continued gains needed to maintain demand for junk bonds “would imply pushing the market valuations further beyond any reasonable levels, thus undoing the very reason for being aggressive in buying risk at these levels,” New York-based Melentyev wrote in a Feb. 8 report. That’s “an unstable combination indeed.”
Elsewhere in credit markets, JPMorgan Chase & Co. is seeking to sell securities tied to new U.S. home loans without government backing in its first offering since the financial crisis. Morgan Stanley raised $4.5 billion in its second benchmark-size corporate bond deal this year. A gauge of U.S. company credit risk rose from a more than three-week low.
Credit Gauges