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Junk Bonds Take a Dive

The mood in the market is decidedly risk-off, and that is apparent in the junk bond space.

Junk bonds (rated below Baa3 by Moody’s and below BBB- by S&P) lost -4.6% in August, the worst performance since November 2008. Last week, junk bond mutual funds had a fifth consecutive week of outflows, with investors pulling $96.44 million… three weeks prior to that withdrawals reached $3.42 billion (according to Lipper).

A lack of demand for high-yield debt has led to a lack of issuance. New junk bond offerings in August fell to the lowest level since December 2008, when the credit market was paralyzed in the midst of the financial crisis.

The lack of interest in junk bonds is evident looking at a proxy, SPDR Lehman High Yield Bond ETF (JNK). Granted, default rates are low (at 1.1%, compared with 9% in 2008), but in a flight to quality across asset classes, investors have doubts about the ability of junk bond issuers to service their obligations. And while we haven’t seen a return to the indiscriminate selling of 2008, warning signals are flashing in the space: the fund signaled an intermediate-term sell in early August, and is now approaching a long-term sell.


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