Investors are shying away from the riskiest US corporate debt as fears of an impending recession fuel a growing divide between the highest- and lowest-rated companies in the $1.4tn high-yield bond market.
Last month’s banking crisis sparked a sell-off in so-called junk bonds of all stripes. But while higher-quality debt has clawed back its losses, investors have been reluctant to re-enter more speculative bets as they worry that an economic downturn could lead to defaults among the most indebted companies.
“Investors do see some type of recession coming,” said Steve Caprio, head of European and US credit strategy at Deutsche Bank. “If there is going to be some US growth and earnings slowdown, they would rather be in the higher-quality securities today.”