A gauge of high-yield bond performance was trading close to its lowest since early 2016 on Friday, a day after the riskiest U.S. corporate bonds suffered their biggest daily drop in nearly three years and in sync with a broad pullback from stocks and other risky assets.
The iShares Iboxx High Yield ETF was down around half a percent in early afternoon trading and has fallen 7.2 percent so far this quarter, putting it on pace for its poorest quarterly performance since 2011.
High yield, or junk bonds, are closely followed as a measure both of investors’ tolerance for risk and by policy makers as a gauge of whether credit conditions for American companies are loose or restrictive. Their recent weak performance reflects a sharp tightening of financial conditions in the sector as the U.S. Federal Reserve raises interest rates and winnows down its own vast holdings of U.S. Treasury debt.
Friday’s drop came after one of the high-yield sector’s most closely tracked benchmarks, the Bank of America/Merrill Lynch High Yield Master Index, tumbled by the most since February 2016 on Thursday. The index’s total return on the day was negative 1.1 percent.
Moreover, the premium investors are demanding to hold low-rated corporate bonds rather than safer U.S. Treasuries has risen sharply this quarter. The spread, or additional yield, of junk bonds over Treasuries has widened by 187 basis points since the end of September, the largest increase since the third quarter of 2011.
High-yield spreads now stand at their widest in more than two years, reflecting the broad-based cold shoulder investors are giving to risky assets like junk bonds and stocks as the outlook for economic growth has become more uncertain and the Fed continues raising interest rates as it did this week for the fourth time this year.
Major benchmarks of U.S. equity performance are down by more than 10 percent in December alone. On Friday, the S&P 500 was off by 1.4 percent and the Nasdaq Composite was down 1.9 percent and trading at bear market levels, down more than 20 percent from its record high in late August.
In another sign of tightening conditions in the sector, no company has brought a new junk bond deal to the U.S. corporate bond market so far in December, according to Refinitiv’s IFR corporate finance unit.
With Wall Street’s deals machinery largely shut down for the approaching Christmas and New Year’s holidays, no new deals are likely to come before early January, which would make December the first month in a decade to see no fresh capital raised in the junk bond market. The last time that happened was in November 2008, when credit markets were effectively shut down by the financial crisis.
The troubles are not limited to low-rated companies. Merrill Lynch’s index of investment-grade corporate debt fell by the most in six weeks on Thursday and is on pace for its worst yearly performance since 2008 with a total return of negative 2.3 percent so far this year.