Stocks’ Worst Week Since March Spills Over Into Junk

The same risk aversion that sent US stocks tumbling towards their worst weekly performance since the March meltdown spelled trouble for junk bonds.

At least two deals were yanked this week as conditions deteriorated and inflows turned to outflows.

With the US election looming, COVID-19 infections rising to records across the western world, and oil sinking, investors pulled more than $2.5 billion from high yield funds in the week through October 28, the latest Lipper data shows.

It was the first outflow since late September and the fourth largest since March.

As you can see from a quick glance at the visuals (above and below), investors cooled on junk as summer turned to autumn. EPFR’s data shows outflows accelerating to $3.4 billion last week.

In addition to the rout in equities, crude was pacing for its worst monthly slide since March. Supply concerns are once again colliding with the threat of stringent lockdowns, and a double-dip recession is now widely seen as a foregone conclusion in Europe.

None of that is positive for junk. Global high yield has returned just over 1% in 2020, remarkable considering the circumstances.

In the US, the Fed’s backstop for investment grade corporate bonds pushed investors down the quality ladder, benefitting riskier credit. But the market isn’t totally immunized (pardon the virus pun). Spreads were wider by more than 40bps this week (figure above).

Jerome Powell also pledged to buy fallen angels, of course, and the Fed’s corporate bond-buying program helped ensure the primary market remained forgiving.

2020, you’re reminded, was a record year for junk issuance. In the middle of a depression.


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2 thoughts on “Stocks’ Worst Week Since March Spills Over Into Junk

  1. I was busy slaving away, paying only attention to my job, as I am, fortunately, still gainfully employed, when I peeled my attention off to another browser tab, only to view another day of carnage.

    Couple of basis points here and there on the long bond is not a big deal. But quite the scene, like we’re watching the breakdown of a paradigm as bonds fall with stocks these days. So, pundits have called the bond bull over and dead. We’ll see if there’s one more trade in the beast during the upcoming months of our discontent.

NEWSROOM crewneck & prints