The recent sell-off in the high yield bond market could mean an increase in bankruptcy filings as shaky companies that depend on that market find it is closed to them, according to Oleg Melentyev, head of high yield strategy at Bank of America. Despite the extremely low yields on traditionally safe investments such as certificates of deposit and money market funds, weak economic data, U.S. budget concerns, rising commodities prices, and, especially, a resurgence of Europe’s sovereign debt problems sent many investors out off riskier asset classes like high yield bonds and into U.S. Treasuries.
High yield bonds had provided strong returns in recent years, but they plunged along with the stock market. High yield bonds have historically been more highly correlated with equities than the bond market. Even the “safest” high yield bonds have sold off.
As high yield bonds tumbled along with stocks’ worst performance in three years, some say it is “eerily reminiscent of the months leading up to the Lehman Brothers’ bankruptcy in 2008.” (“Junk bonds get crushed in market chaos,” CNNMoney). “You can see a path where if things are handled poorly then you have a replay of 2008, said Melentyev. Greece admitted today that it will not meet its deficit reduction targets, rekindling fears of a default.
Hedge funds, which are big market movers, have been selling high yield bonds in anticipation of redemption demands. Prices have dropped sharply because banks, having grown more conservative, are less willing to take the other side of the trade, according to James Keenan at BlackRock, the world’s largest money manager.
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