High-Yield Debt Pummeled in ‘Ugly’ First Quarter

Investors in junk bonds saw their worst quarterly losses since 2008 as the “grim reality” of the recession’s potential depth continues to settle, according to Bank of America.

Nathan Laine/Bloomberg

Nathan Laine/Bloomberg

High-yield debt was hammered in the first three months of this year, marking the worst quarterly performance since the 2008 financial crisis as the coronavirus wreaked havoc on markets, according to Bank of America Corp.

Junk bonds lost 13 percent in the first quarter, the biggest drop since losing 18 percent in the fourth quarter of 2008, when markets were reeling during the global financial crisis, the bank’s credit strategists said in a research note Friday. “This makes it the second worst quarter in the last 33 years,” they said.

Investors holding energy debt saw particularly large losses, with high-yield bonds in the sector losing 40 percent in in the first quarter, according to the report. The risk of default for high-yield borrowers has jumped as the pandemic takes a toll on economic activity across the U.S.

“The grim reality of potential depth of this recession continued to settle in recent days,” the Bank of America’s credit strategist said in the report. “We are in a completely uncharted territory in terms of the speed of economic collapse.”

During an “ugly” first quarter, spooked investors fled risky debt as fears over the virus intensified, according to the report. Investors have pulled a net $15.8 billion from high-yield funds this year, the strategists said, though outflows have “eased” since the Federal Reserve’s emergency intervention last month.

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“A sharp immediate contraction in economic activity followed by a sooner-than-normal rebound could be more favorable from standpoint of corporate defaults,” they said, “compared to a slow-moving and protracted recession.”

Predictions are tough in the chaos surrounding the coronavirus.

“Any estimates produced in this environment are going to be subject to very wide ranges and multiple revisions,” the strategists said. “It’s very difficult to extrapolate how things will develop.”

Initial U.S jobless claims for the week ended March 28 exceeded Wall Street’s expectations, with the Department of Labor revealing April 2 that a record 6.6 million claims were filed for that period. Bank of America had predicted late last month that about 2.5 million jobless claims would be filed in the week ended March 28. On April 1 the bank revised its forecast to 5.5 million.

In another revision this week, the bank slashed its expectations for economic growth, with its economists citing an ineffective response to control the spread of the coronavirus.

The economists now expect U.S. gross domestic product will fall 6 percent this year, compared with an earlier forecast for a 0.8 percent decline in GDP, according to a Bank of America research report dated April 2. They also revised their expectations global growth, cutting their 2020 forecast for a 0.3 percent expansion to a decline of 2.7 percent.

“This is considerably worse than the 2008-09 recession,” Ethan Harris, the bank’s global economist, said in the report. “Both policymakers and the public in many economies have not learned the lesson from China: the most effective policy is a quick and strict lockdown.”

In the meantime, some investors have waded back into the volatile, high-yield bond market.

Funds that buy the debt attracted about $4.1 billion of net inflows in the past week, according to Bank of America research. The bank’s credit strategists also said the high-yield bond market “reopened slightly” for new deals, after being frozen for more than three weeks.