Oil’s Rout Is Making Junk Bond Investors (More) Nervous

Posted November 29, 2018 5:46 p.m. EST

Investors are growing nervous about corporate debt. Falling oil prices deserve some of the blame.

The average yield on risky company bonds — measured by the BofA Merrill Lynch U.S. High Yield index — has climbed to 7.3 percent. Yields rise when bond prices fall.

Notably, junk bond yields have moved higher as the rate on Treasurys has retreated. That has pushed the difference between them to its highest level in about two years. The wider spread is an indication that investors are demanding greater compensation against the risk of default.

What does the price of crude oil — which has dropped more than 30 percent in the past two months — have to do with this?

U.S. energy companies have been the biggest issuers of high-yield bonds since 2015, according to Dealogic, and their bonds account for about 15 percent of the market. As the price of crude falls, investors’ concerns about the health of these companies and their ability to pay off the bonds grows.

It’s not for nothing. In 2014, when oil prices began to slide, hundreds of smaller drillers went bankrupt, and manufacturers and other businesses that supply the energy industry also took a hit.

But energy companies or high-risk companies aren’t the only reasons for the growing caution. As concerns about the global economy and the strength of earnings mount, investors are demanding more to buy the debt of highly rated companies as well.

Such moves, if they persist, suggest the favorable borrowing conditions that companies have enjoyed for years won’t be as agreeable.