Volatility in the Junk Bond Markets

Volatility within the junk bond markets has caused US energy giant, NRG Energy, to end a debt sale.
In a statement, NRG Energy stated that “borader market conditions” were the reasons for a pulled $870m bond sale late on Thursday and blamed “broader market conditions” for its decision, after the market had lurched lower over the preceding trading days. The next day coal producer Canyon Consolidated Resources became followed suit and also pulled a bond sale due to worries about volatility in credit markets.

The two largest junk bond exchange traded funds have fallen to their lowest levels in over seven months with the average high-yield bond dropping by a penny on the dollar. In the past month, $2.5bn have left U.S junk bond market. This number is comprised of $1.2 billion leaving two weeks ago and $621.9 million leaving U.S. junk portfolios in the latest reporting week.

The reason behind this trend is the poor quarterly results by many of the largest high-yield bond issuers. Due to an overwhelming presence of said issuers in popular ETFs, selling pressures can be accelerated upon poor results. Specific news such as the collapse of the Sprint Corp and T-Mobile U.S. Inc merger, the challenges to the AT&T Inc and Time Warner Inc merger, a credit downgrade for Teva Pharmaceutical Industries Ltd, and overall uncertainty over tax reform have enhanced volatility in the market.

Keith Knutsson of Integrale Advisors stated, “this is a modest correction and natural in the context of the continuously tightening spreads throughout the year.”

Currently the high yield debt market has not seemed to have affected equities, but investors are wary of such a development going forward.