Bankruptcies about to rise – Bank of America

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The market meltdown of the past few weeks is hurting various corners of the financial system. One area in which things are expected to go from bad to worse? High yield bonds.

High yield — or junk — bonds carry lower quality labels from ratings agencies like Standard & Poor’s and Moody’s because the companies behind them are less credit worthy. Ordinarily, these bonds also yield more than safer options, giving investors more bang for their buck.

But that hasn’t held true of late: “The high yield index has now erased all of its total returns going back to January 2017,” said Oleg Melentyev and Eric Yu, credit strategists at Bank of America Merrill Lynch, in a note Friday.

The market meltdown of the past few weeks is hurting various corners of the financial system. One area in which things are expected to go from bad to worse? High yield bonds.

High yield — or junk — bonds carry lower quality labels from ratings agencies like Standard & Poor’s and Moody’s because the companies behind them are less credit worthy. Ordinarily, these bonds also yield more than safer options, giving investors more bang for their buck.

But that hasn’t held true of late: “The high yield index has now erased all of its total returns going back to January 2017,” said Oleg Melentyev and Eric Yu, credit strategists at Bank of America Merrill Lynch, in a note Friday.

The credit cycle has turned and the number of companies defaulting on their junk debt is about to jump, according to the analysts.

The defaults will be driven by companies in the energy industry, with the default rate across sectors at 9%. In normal credit cycles, default rates peak at 10% to 12%, the analysts said.

Energy and gaming have been the worst hit segments in high yield over the last week, month and year-to-date,” the analysts said in a note Friday.

With tumbling oil prices, energy companies will struggle in the near term — but lack of credit-worthiness will make things harder for them for a long time to come.

has turned and the number of companies defaulting on their junk debt is about to jump, according to the analysts.

The defaults will be driven by companies in the energy industry, with the default rate across sectors at 9%. In normal credit cycles, default rates peak at 10% to 12%, the analysts said.

Energy and gaming have been the worst hit segments in high yield over the last week, month and year-to-date,” the analysts said in a note Friday.

With tumbling oil prices, energy companies will struggle in the near term — but lack of credit-worthiness will make things harder for them for a long time to come.

— CNN

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