Update Bonds: Are recent collapses affecting credit markets?
Over the past few months, investor confidence in the US credit market has been shaken by a series of recent bond collapses, including Saks, Tricolor Holdings and First Brands Group. Notably, most of these defaults have occurred within the private debt and leveraged loan markets.
The US corporate high-yield spread, as measured by Bloomberg, rose by 30 basis points this month, reaching its highest level since June. Despite this, US credit spreads, both investment grade and high yield, remain at historically low levels. Credit markets continue to demonstrate resilience, buoyed by an abundance of liquidity
Investors flush with cash are eagerly pursuing opportunities. But this often means accepting lower yields and, at times, neglecting thorough research into the underlying investment. Meanwhile, the low credit spreads and yields are incentivizing corporations to borrow more, even sometimes to finance risky investments or leveraged buyouts.
The case of First Brands Group exemplifies the risks associated with the opaque world of private financing. Over the course of a decade, this auto-parts supplier received more than USD 10 billion from firms like Millennium Management and UBS Group funds, despite limited transparency about its business model, financial structure and leadership. Even investors attempting due diligence faced significant challenges, as private deals often provide only minimal information to regulators, credit rating agencies and investors alike.
Experiencing a loss of 60% or more on a bond within a short period due to a default or restructuring can have a disproportionately negative impact on a portfolio’s overall performance. If the position was overly concentrated, it could take years to recover from such a setback. To mitigate this risk, it is advisable to diversify higher-risk bond investments, for instance, by investing through a fund or an exchange-traded tracker.
It is worth noting that none of these collapses have significantly impacted the broader public corporate markets. This year, both investment-grade and high-yield bonds have delivered strong returns, fuelled by robust investor demand. The Bloomberg Global Investment Grade Corporate Index has risen by 9.6% year-to-date, potentially marking the best performance in the past 15 years. Similarly, global high-yield bonds are showing solid gains, supported by consistent investor interest.
Given the current environment of historically low credit spreads, we prefer investment-grade bonds over riskier high-yield bonds.