The worst debt-market slump in seven months is starting to disrupt bond sales by risky companies as investors retreat from funds that buy the debt.
Construction company Tutor Perini Corp. pulled a $500 million speculative-grade bond offering because of "adverse market conditions," it said in a statement late Wednesday. That left Wall Street underwriters without a junk-rated sale for the second day this week as anxiety about Tuesday's U.S. presidential election and a possible interest-rate hike next month by the Federal Reserve gripped capital markets.
Yields on high-yield bonds jumped for six straight days to 6.5 percent on Thursday — their highest in three months, according to Bloomberg Barclays index data. Borrowing costs were at their 2016 low of 5.98 percent just last week, the data show, as junk bonds headed for their best returns since 2009.
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Bonds sold by CF Industries Holdings Inc. were the worst performers on Thursday after the company's credit line was cut in half. Dollar bonds issued by steel producer ArcelorMittal SA also dropped, as did notes issued by American Axle & Manufacturing Holdings Inc. after the company announced an acquisition. Investors have been pulling out of the two-biggest exchange-traded funds that buy speculative-grade corporate debt, redeeming $3.4 billion since Oct. 25 from the State Street Corp. and BlackRock Inc. funds.
"The high-yield market became too complacent and volatility was due to pick up," said Bill Zox, chief investment officer for fixed income at Diamond Hill Investment Group. "If a credit has a poor earnings report or a regulatory issue or a debt-financed merger, there can be an air pocket and bond prices drop precipitously."
Junk bonds have been on a tear this year as investors piled into riskier assets for income as easy money policies in Japan and Europe helped turn yields negative on more than $9.8 trillion of bonds. High-yield debt has been so appealing that JPMorgan Chase & Co. boosted its 2016 return forecast for the securities to 17 percent in September, up from an original estimate of 12 percent.
American Axle's $550 million of 6.625 percent bonds due in 2022 dropped 2.5 cents to 102.5 cents on the dollar on Thursday after the auto parts supplier agreed to buy Metaldyne Performance Group Inc. in a $1.6 billion deal, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
ArcelorMittal's $850.9 million of 9.85 percent bonds due in 2019 were down 1 cent to 118.5 cents, Trace data show.
"We've had a big year for returns in credit and high-yield in particular," said Michael McEachern, head of public markets at New York-based Muzinich & Co., which oversees $28 billion in assets. But "concern about rising rates and anxiety about elections next week are creating a perfect storm for volatility," he said.
Bloomberg News
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