Mood turns dour in high-yield bond market

NEW YORK — The market for high-yield bonds, also known as junk bonds, has taken a beating recently because of fears of economic weakness and what it may do to highly leveraged companies.

“There’s a lot of nervousness about interest rates, the economy, and corporate earnings,” said Eric Tutterow, senior director of high-yield corporate finance at Fitch Ratings.

A sluggish economy would be a big blow to the high-yield market, especially after all the highly speculative triple-C-rated deals that were sold during the boom times of the past two years — with yields that came close to historic lows. In a tougher economy, rates tend to rise.

“The shaky deals are coming to roost now, or at least beginning to,” said Fitch’s Tutterow.

While Thursday’s data on gross domestic product, which grew at a softer-than-expected 3.1 percent annual rate in the first quarter, was benign for the high-yield market, Wednesday’s data on big ticket orders was unsettling. Durable goods orders fell a seasonally adjusted 2.8 percent in March, well below the 0.3 percent gain expected by economists, and equities and high-yield bonds lost ground.

Junk bonds have been battered since mid-March, when General Motors Corp. sharply cut its profit outlook for the year, raising concerns that the giant issuer’s debt could swamp the high-yield market. Volatility in the Treasurys market — with yields shooting up to close to 4.70 percent before dropping back to 4.25 percent as the market swings from worrying about inflation to fretting over growth — and shaky equities markets are adding to the high-yield market’s woes.

The Merrill Lynch U.S. High Yield Master II Index lost 3.29 percent from March 11 through Wednesday.

“Everybody’s running for the sidelines and piling into Treasurys until there’s clarification of what’s going to happen” with the economy, said Tutterow.

While the market has snapped back from selling bouts in the past two years, the mood this time is more somber.

A strong rebound is “very unlikely,” said Steve Persky, managing partner at Dalton Investments with $970 million total assets under management — including high-yield bonds and distressed debt. Outflows from high-yield mutual bond flows have been “relentless,” he noted.