Junk Bonds Stage a Comeback as Investors Regain Risk Appetite

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As the Federal Reserve raised interest rates, trying to cool the economy by increasing borrowing costs, companies that are considered risky have found it harder to raise debt. But firms with low credit ratings, whose debt is often referred to as “junk,” are now taking advantage of a window of opportunity to borrow more cash.

Junk-rated companies, which tend to pay higher rates, have sold $4.1 billion in bonds in the United States this week, according to Refinitiv. Already, issuance of junk bonds has reached the highest weekly amount since early June, just before investor confidence cratered, the stock market reached its nadir and lenders backed away from junk bonds, which are also known as high-yield debt.

A batch of better-than-expected corporate earnings reports and positive economic data has recently lifted stock markets, eased volatility and softened some investors’ forecasts for the Fed’s rate-raising campaign. The junk bond market has also begun to thaw: This week’s issuance topped the total for all of July.

Yet bankers and investors warn that the time for these riskier borrowers to raise fresh funds may be short. Companies with debt and payments to lenders soon coming due have jumped at the chance to refinance.

“Depending on your view of the overall economy, this might be a really good opportunity to tap the market,” said John Gregory, the head of leveraged syndicate at Wells Fargo, who works with companies to sell high-yield bonds to investors.

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Inflation F.A.Q.

What is inflation? Inflation is a loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today. It is typically expressed as the annual change in prices for everyday goods and services such as food, furniture, apparel, transportation and toys.

Inflation F.A.Q.

What causes inflation? It can be the result of rising consumer demand. But inflation can also rise and fall based on developments that have little to do with economic conditions, such as limited oil production and supply chain problems.

Inflation F.A.Q.

Is inflation bad? It depends on the circumstances. Fast price increases spell trouble, but moderate price gains can lead to higher wages and job growth.

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Can inflation affect the stock market? Rapid inflation typically spells trouble for stocks. Financial assets in general have historically fared badly during inflation booms, while tangible assets like houses have held their value better.

The embattled cruise operator Royal Caribbean raised $1.25 billion on Monday, paying a hefty interest rate of 11.63 percent. The company will use the cash in part to pay back investors that lent it $650 million in 2012, which comes due in November. When it borrowed that money, before the pandemic ground the cruise industry to a halt, the company paid an interest rate of 5.25 percent.

The recent rise in issuance has been aided by four consecutive weeks of cash flowing into funds that buy U.S. high-yield bonds, the longest streak in nearly a year.

“The fear of the market going lower turned into a fear of missing out,” said John McClain, a portfolio manager at Brandywine Global Investment Management.

However, the market has remained closed to the very riskiest issuers. Credit ratings for junk issuers range from BB to CCC, the lowest rung on the scale. (The safest, “investment grade” borrowers are rated BBB up to AAA.) There has only been one CCC-rated deal since the end of April, a $400 million bond from packaging manufacturer Intertape Polymer in June.

On Thursday, S&P Global Ratings said that it expected 3.5 percent of junk issuers to default on their debt in the 12 months through June 2023, more than double the 1.4 percent rate in the year through June 2022. Roughly $90 billion, or 6 percent of the junk bond market, remains in distress — defined as trading at a yield above Treasuries, or “spread,” of more than 10 percentage points — according to ICE Data Services.

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Nick Kraemer, an analyst at S&P Global Ratings, said that the absence of a “rush to lend” to the very riskiest companies showed some caution among investors as they evaluate whether the next move for the market will be higher or lower.

Both high-yield bonds and the stock market ended the week somewhat lower than where they started, as a rally that has lifted company valuations and debt prices over the past two months paused.

Investors are split on how aggressive the Federal Reserve will be as it raises interest rates in an attempt to cool the economy by enough to tame inflation but not so much to trigger a severe downturn. Market moves will be driven by investors’ assumptions about “whether we get to a soft landing or whether we see a deeper recession,” said Mr. McClain.

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