Record issuance in the corporate bond market is giving fixed income investors an abundance of opportunities. However, due diligence is necessary as high-yielding bonds may uncover a risky proposition that doesn’t quite match an investor’s risk profile.
As the Financial Times reported, risky corporate bonds are in a precarious position. With interest rates still relatively high, they are having to tread water in order to keep servicing current debt until interest rates finally fall. With a data-dependent Federal Reserve that’s keen on holding rates steady for longer than expected, this could put companies at risk for defaulting on debt.
As the FT report noted, the evidence is in the spread, meaning the amount high-risk companies must pay to issue debt versus their safe-haven Treasury counterparts. The spread has reached 9.28, which is 77 basis points higher than what it was in December.
Furthermore, the avenues for borrowing are simply drying up for high-risk companies. The current borrowing environment favors more fundamentally sound companies and those with the lowest quality could proverbially get left in the cold, thus sparking a potential wave of defaults.
“Our view is that for reasonably high-quality businesses, there will be interesting ways to access capital,” said Ed Testerman, partner at investment management firm King Street Capital. “[But] for the lowest quality companies, there will be fewer options at their disposal, which may drive more defaults.”
All this said, it begs the question of how can fixed income investors get the attractive yields of corporate bonds while mitigating risk?
