Risk premiums in the US junk bond market’s riskiest slice soared past 1,000 basis points on Monday as the collapse of Silicon Valley Bank sent corporate funding costs higher and kept borrowers on the sidelines.
(Bloomberg) — Risk premiums in the US junk bond market’s riskiest slice soared past 1,000 basis points on Monday as the collapse of Silicon Valley Bank sent corporate funding costs higher and kept borrowers on the sidelines.
The average spread over Treasuries for bonds in the Bloomberg Barclays Caa US High Yield Index widened 64 basis points to 1,003 basis points, the highest since Dec. 30, and a level that’s typically associated with distress.
Debt carrying ratings in the CCC tier is among the riskiest in the market, yet it’s outperformed many other areas of fixed income for much of this year. The segment surpassed all other fixed-income US bonds and the S&P 500 in February after providing its best January returns since 2003.
The fallout isn’t isolated to junk debt. In the investment-grade corporate bond market, risk premiums rose 16 basis points to 152 basis points above Treasuries, the biggest jump since March 2020 when the onset of the Covid-19 pandemic in the US prompted a sharp selloff.
The flight from risk amid elevated volume signals investors are rushing to hedge in the wake of Silicon Valley Bank’s demise. Government-backed home loan company Fannie Mae postponed the sale of more than $500 million in mortgage-linked bonds, while global primary bond sales seized up.
Read more: Borrowers Thwarted by SVB Shock as Credit Risk Hits 4-Month Peak
Junk bond issuance had been quiet before the Silicon Valley Bank shock, however. The market’s last deal priced on March 2, when insurance and risk management services firm Navacord Inc. raised $500 million.
In the US leveraged loan market, meanwhile, average prices saw their biggest drop in nine months Monday. Prices fell 0.79% to 93.27 cents, the biggest one-day drop since June 13, and the lowest levels since Jan. 9, according to data compiled by Bloomberg.
–With assistance from Gowri Gurumurthy, James Crombie and Michael B. Marois.
(Updates with investment-grade risk premiums in fourth paragraph)
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