Bond buyers are sending a loud message this month: They want a break from the riskiest securities.
The past three weeks have marked the biggest collective souring on high-yield bonds since last June, bringing an abrupt halt to the 10.4% return over the previous 10 months. Even short-term junk-rated notes — typically more immune to such swings in sentiment — have suffered, with investors yanking the most money ever from a Pacific Investment Management Co. exchange-traded fund focused on such debt.
It's hard for bond buyers to stomach extra risk in the face of escalating conflicts in Gaza and Ukraine, especially when they're getting about the lowest compensation ever to own speculative-grade debt. Borrowing costs are now starting to rise for the least-creditworthy U.S. companies amid the violence in some of the world's more volatile regions, underscoring just how intertwined the global economy has become.
“The market reaction highlights what our credit investors considered the number one concern in our recent survey — namely, geopolitical risk,” wrote Bank of America Corp. (BAC) strategists led by Hans Mikkelsen in a July 17 report.
Last week they pulled $607 million from Pimco's 0-5 Year High-Yield Corporate Bond index ETF, data compiled by Bloomberg show. That was the biggest withdrawal in the three-year-old fund's history, and is a reversal in fortunes for an ETF that received $1.8 billion of deposits over the past year.
High-yield notes maturing in five years or less have lost 0.4% in July, Bank of America Merrill Lynch index data show. The overall U.S. junk-bond market is down 0.63%.
Federal Reserve Chair Janet Yellen's warnings this month that “valuations appear stretched” in high yield have built on a growing sense of dread that this overheated asset class will result in severe losses when the market turns.
The same concern about rising rates doesn't seem to be plaguing investors in higher-rated debt yet. They poured $2.8 billion into investment-grade bond funds last week, helping generate positive returns of 0.2 percent on the notes this month, Bank of America data show.
Meanwhile, yields on U.S. junk bonds have climbed to 5.94% from a record low of 5.69% on June 23, according to Bank of America Merrill Lynch index data.
In spite of the Fed's pledge to keep benchmark interest rates low for a prolonged period, junk-bond investors are starting to get weak-kneed and preparing for the worst.