The spiciest end of corporate credit was once known as ‘junk bonds’. Highly leveraged or structurally challenged companies whose survival was uncertain and where lenders demanded juicy returns. They were rebranded ‘high yield bonds’ in a Wall Street makeover, given a veneer of respectability and somehow have made it into conventional portfolios.
Today the ‘high’ yield on ‘junk bonds’ is just 3.9%.3 Boom times are back with issuance of $140bn of debt in the first six weeks of 2021.4 The run rate issuance for the lowest rated CCC-rated bonds is more than double the previous record.5 When was the last record? Just before the global financial crisis.6
An example of the madness: the retailer Party City (been to many parties recently?) raised $750m for five years in February. A year ago, their bonds were on the edge of default and traded at below ten cents on the dollar! 7
Is lending to companies which are one month’s bad trading (or mandatory lockdown) from insolvency appropriate for most investors? What do these bonds add to a portfolio? Attractive income is available in equities and interesting diversifiers are available in gold or bitcoin. Equity has asymmetric upside, junk bonds have asymmetric downside! Who is buying this stuff?