US Junk Bond Market Becomes Oxymoron

It’s hard to know what a “milestone” is these days, mostly because we seem to hit one every session or two.

“Stocks hit records” isn’t even worth mentioning anymore. Seriously. I actively avoid saying that, when possible, because it comes across as lazy analysis. That is: Of course stocks hit records. That’s what stocks do.

It’s the same thing across most risk assets, although there are pockets of the market ostensibly tethered to the reflation trade that haven’t yet caught up to other manifestations of the same reflationary momentum. For example, Morgan Stanley this week noted that “inflation levered stocks are still lagging the move in breakevens.” As a quick aside, that move (in breakevens) has been dramatic, so you can’t really “blame” any equities-based plays on it for failing to keep up.

All of that to say that high yield celebrated a new milestone this week. Yields on junk fell below 4% for the first time.

Once again, “high” yield is an oxymoron. CCC yields are at record lows too, as investors are herded frantically out the risk curve and down the quality ladder, in an increasingly ridiculous and desperate hunt for any semblance of yield.

If you’re wondering what the supply picture looks like, issuance is up to nearly $60 billion in 2021. January ended up being the third-busiest month ever.

The last time I looked at this was January 24. When I refreshed the spreadsheet (used for the figure, below), I had to check the data to make sure it was right. Junk sales last month totaled more than $50 billion.

This deluge comes on the heels of a record year for junk supply. It’s still quite remarkable to fathom a conjuncture that juxtaposes a pandemic and attendant existential threats to entire industries with record-low borrowing costs for the worst-rated corporates, and demand so voracious that even massive supply can’t sate it.

“Money managers are having such a tough time getting their hands on debt in the $2.8 trillion market for junk bonds and leveraged loans that they’re calling up companies and pressing them to borrow, instead of waiting for bankers to bring new deals to them,” Bloomberg wrote late last week.

I was going to editorialize further around this, but somehow, I think that quote suffices.

Oh, one more thing. Don’t think this can’t get sillier. Because it can. Recall that starting in 2019, some “high” yield bonds in Europe began sporting yields below zero.