Stock Market Pain Bleeds Into Junk Bonds as Hedging Costs Surge

(Bloomberg) -- Credit traders haven't been this apprehensive about junk bonds for more than a year.

A measure of credit risk for U.S. high-yield bonds reached the highest levels since December 2016, as jittery investors cut risk amid a stock market plunge. The cost to protect a basket of junk bonds against default rose as much as 12.7 basis points to more than 373 basis points on Monday afternoon in New York, according to data provider CMA.

The biggest exchange-traded fund that buys the debt reversed last week's recovery to return to levels near November 2016 lows. So far this year, investors have pulled more than $6 billion from the two largest junk-bonds ETFs.

A 3.1 percent drop in crude oil made debt tied to energy companies including Weatherford International Plc some of Monday's biggest losers. The cost of buying protection against default rose for all types of junk bonds besides utilities.

As London markets reopened on Tuesday after a public holiday, a similar gauge of risk for European sub investment-grade company debt, also rose. The Markit iTraxx Europe Crossover index increased about 5 basis points to 288 basis points, close to an 11-month high touched last week.
The fresh pain comes after junk bonds suffered their worst first quarter since the financial crisis, in a sign ever fewer corners of the credit market are immune to the concerns that helped clobber returns of their investment-grade counterparts. The Bloomberg Barclays U.S. Corporate High Yield Bond Index posted a 0.86 percent loss through March 30, even after including interest earned on the securities, according to data compiled by Bloomberg.

--With assistance from James Crombie

To contact the reporter on this story: Claire Boston in New York at cboston6@bloomberg.net.

To contact the editors responsible for this story: Nikolaj Gammeltoft at ngammeltoft@bloomberg.net, Sally Bakewell, Dan Wilchins

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