Corporate & Securities Law

What Will Wall Street do With the Junk Bonds in their Inventories?

By Kate Maddox

As the Wall Street Journal noted this morning (?Investors, Fearing Defaults, Rush Out of Junk Bonds?), ?the specter of widespread corporate defaults in the coming months has caused a massive selloff in junk bonds around the world, as many debt-laden companies face the prospect of going weeks or months with virtually no revenue.?

In fact, ?investment-grade ratings plunged at their fastest pace in history in March, money managers said, stunning investors and hitting levels that portend a deep recession with scores of company failures. While some junk-bond prices recovered slightly in recent days, investors say the broad declines ? of about 20% this month alone ? have been exacerbated by Wall Street?s reluctance to help cushion the market by stepping in to buy the bonds and risk getting stuck with them on their books.?

Just a few months ago, ?the junk bond market was priced to perfection at the start of 2020. Risky companies were borrowing at near record-low rates relative to U.S. Treasury yields, the culmination of a years? long reach for higher returns by investors world-wide. They poured cash into a range of risky assets, pushing returns down. Companies took advantage of the flood of money by issuing more non-investment-grade debt.?

According to the WSJ, ?U.S. junk bonds are on average trading at about 81 cents on the dollar, after bouncing off recent lows of 79 cents, according to an ICE Bank of America index. In early March, the average price was close to 100 cents. More than 1,400 bonds ? 43% of those tracked in an influential $2.1 trillion index of global junk bonds ? are currently trading at what investors consider distressed levels, with yields that are more than 10 percentage points above those on risk-free U.S. Treasuries, according to a global ICE index. Less than three weeks ago, before the rout began, that number was below 450. The wide spreads indicate the market expects default rates to climb significantly.?

In fact, earlier this month, Moody?s Investors Service said that in a ?pessimistic scenario,? close to 10% of speculative grade issuers could default.?

While ?the Federal Reserve earlier this week said it would help support the markets for highly rated corporate, mortgage and municipal debt to alleviate market strains and unusual dislocations, junk bonds weren?t part of the package, meaning that segment of the market has little backstop.?

Perhaps this is the reason that ?large and small investors have pulled tens of billions of dollars out of high-yield bond funds, forcing asset managers to liquidate their holdings and deepening the slide in prices.?

Recently a number of corporate bond funds took substantial hits to their prices. For example, during the 2 week period between March 6th and 20th, the Invesco Corporate Bond Fund (ACCBX) declined from $7.89 to $6.75 per share which equated to a 15% loss; the Pimco Investment Grade Credit Bond Fund (PBDAX) declined from $11.37 to $9.68 per share which equated to a 15% loss; the Fidelity Corporate Bond Fund (FCBFX) declined from $12.77 to $11.12 per share which equated to a 13% loss; and the Vanguard Intermediate Term Corporate Bond Index Fund (VICSX) declined from $25.61 to $22.80 per share which equated to an 11% loss.

Will Wall Street attempt to dump these bonds on investors who are seeking more potential income in these uncertain times?

If you are an investor who has any concerns about your bond investments with any brokerage firm, please contact attorney Steven B. Caruso in the New York City office of our firm at (212) 837-7908 for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).

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Full post as published by Representing Investors on March 27, 2020 (boomark / email).