High-yield debt crushed in ‘ugly’ first quarter

High-yield debt has been hammered in the first three months of this year, marking the worst quarterly performance since the 2008 financial crisis as the coronavirus wreaked havoc on markets, according to Bank of America Corp.

Junk bonds fell 13% in the first quarter, the biggest decline since losing 18% in the fourth quarter of 2008, when markets reeled during the global financial crisis, the bank’s credit strategists said on Friday. in a research note. “That makes it the second worst quarter in 33 years,” they said.

Investors holding energy Debt saw particularly large losses, with the sector’s high-yield bonds losing 40% in the first quarter, according to the report. the default risk for high yield borrowers jumped as the pandemic weighs on economic activity in the United States

“The grim reality of the potential depth of this recession has continued to set in over the past few days,” the Bank of America credit strategist said in the report. “We are in completely uncharted territory in terms of the speed of economic collapse.”

During an “ugly” first trimester, frightened investors fled risky debt as fears over the virus intensified, the report said. Investors have withdrawn $15.8 billion net from high-yield funds this year, strategists said, although outflows have “softened” since the Federal Reserve’s emergency intervention last month.

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“An immediate sharp contraction in economic activity followed by a faster-than-normal rebound could be more favorable from a business failure perspective,” they said, “compared to a slow and prolonged recession.” .

Predictions are difficult in the chaos surrounding the coronavirus.

“Any estimates produced in this environment will be subject to very wide ranges and multiple revisions,” the strategists said. “It’s very difficult to extrapolate how things will develop.”

US initial jobless claims for the week ended March 28 exceeded Wall Street expectationsthe Ministry of Labor revealing on April 2 that a record 6.6 million complaints were filed for this period. Bank of America predicted late last month that about 2.5 million unemployment claims would be filed in the week ending March 28. On April 1, the bank revised its forecast to 5.5 million.

In another revision this week, the bank cut its economic growth expectations, with its economists citing an ineffective response to control the spread of coronavirus.

Economists now expect U.S. gross domestic product to fall 6% this year, down from an earlier forecast of a 0.8% drop in GDP, according to a Bank of America research report dated 2 April. They also revised their expectations for global growth, reducing their forecast for 2020 from a 0.3% expansion to a 2.7% decline.

“It’s much worse than the 2008-09 recession,” Ethan Harris, the bank’s global economist, said in the report. “Policymakers and the public in many economies have failed to learn the lesson from China: the most effective policy is a fast and strict lockdown.”

Meanwhile, some investors have returned to the volatile high yield bond market.

Funds that buy debt attracted about $4.1 billion in net inflows over the past week, according to Bank of America research. The bank’s credit strategists also said the high-yield bond market “reopened slightly” for new trades, after being frozen for more than three weeks.

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