U.S. Junk Bonds With Negative Yields? Yes, Kind of (#GotBitcoin?)
Some investors are buying corporate bonds that could lose money even if prices don’t decline. U.S. Junk Bonds With Negative Yields? Yes, Kind of (#GotBitcoin?)
In today’s topsy-turvy markets, some investors are buying junk-rated corporate bonds that could lose them money even if their prices don’t decline.
They are simultaneously hunting for yield in a low-interest-rate environment while trying to avoid the very riskiest forms of debt.
On Tuesday, for example, a 6.375% unsecured note issued by Match Group Inc., the company that owns Tinder, OkCupid and other dating websites, traded at 105.349 cents on the dollar, according to MarketAxess.
If held to maturity in June 2024, the bonds would yield around 5%. Their actual yield, though, could be much lower because the bonds became callable in June of this year.
That means Match can already redeem the bonds at a time of its choosing by paying investors a modest premium over their face value. That in turn could produce losses for investors who bought at these levels.
If Match seized on today’s low-interest-rate environment to refinance its 2024 bonds in a month’s time, their actual yield would be minus 0.207%. Even if the company waited until the bonds’ call price drops next June from around 104.8 cents to 103.2 cents, their yield would be just 3.267%.
Other companies with relatively high credit ratings for speculative-grade borrowers, including U.S. Foods Inc. and manufacturer SPX Flow Inc., also have bonds with negative yields by this measure.
There are good reasons why Match and other companies may not redeem their bonds quickly enough to hurt investors. Similar to a homeowner who decides against refinancing a mortgage when factoring in closing costs, investors say the expense for Match of redeeming the bonds at their current call price would likely outweigh the savings from obtaining a lower interest rate on new bonds.
Still, there is always the chance that companies will act sooner than expected if bond yields fall further or they decide they won’t get a better opportunity to refinance their debt.
Moreover, even the hint of negative yields in the corporate bond market is rare, demonstrating the unusual nature of this year’s bond-market rally.
Toward the end of last year, investors dumped nearly every type of riskier asset on fears that the Federal Reserve was being too aggressive in raising interest rates. This year, stocks and corporate bonds have rebounded as the Fed has pivoted to cutting rates.
Still, bond investors have remained cautious as recession fears have lingered, and those that focus on buying speculative-grade bonds have shown a distinct preference for debt with higher credit ratings.
The average yield on double-B bonds, the highest-rated type of speculative-grade debt, has fallen to 4.07% from 4.69% at the start of May, according to Bloomberg Barclays data. The average yield on triple-C bonds, close to the lowest-rated type of speculative-grade debt, has increased to 10.89% from 9.64%.
Declining yields result from rising bond prices and the introduction of new bonds with lower interest rates.
In general, speculative-grade-debt investors are avoiding the higher risk of default in low-rated bonds only to be stuck with stretched valuations in higher-rated debt, said Bill Zox, chief investment officer of fixed income at Diamond Hill Capital Management.
The threat that double-B-rated bonds could be redeemed early should generally limit how high their prices can climb, he said. Yet such bonds could still post large declines if there is another broad flight from riskier assets. U.S. Junk Bonds With,U.S. Junk Bonds With,U.S. Junk Bonds With,U.S. Junk Bonds With