(Bloomberg) -- Junk-bond investors are pilling onto the safest rung of the U.S. corporate high-yield market, pushing yields to their lowest level in almost two years.
The average yield on BB rated notes fell to 4.05% Monday, the lowest since October 2017. Growing concerns about a shift in the credit cycle are driving traders toward lower-risk securities, according to Lale Topcuoglu, senior fund manager and head of credit at J O Hambro Capital Management.
“Investors are sort of hiding out in these BBs,” Topcuoglu said. “They're still earning something, but not necessarily taking the biggest credit risk by being in the CCCs.”
Plunging Treasury yields are also contributing to the high demand, Topcuoglu said. Ten-year U.S. government bond yields have declined more than 50 basis points this month to below 1.5%.
The “precipitous” fall in nominal yields has forced investors who are historically buyers of investment-grade securities into the high-yield market, according to Ken Monaghan, co-head of high yield at Amundi Pioneer.
“So they've had to dip into high yield and from a triple B buyer perspective, the safest place is the double Bs,” said Monaghan in a telephone interview.
While high-yield issuance has ground to a near halt amid the typical August lull, J O Hambro's Topcuoglu still expects a busy primary market following the Labor Day holiday.
“Psychologically it feels quite volatile this month in terms of the ups and downs we are experiencing but August is generally slow,” she said. “I think September will be more telling because everybody will be back.”
To contact the reporter on this story: Caleb Mutua in New York at dmutua@bloomberg.net
To contact the editors responsible for this story: Nikolaj Gammeltoft at ngammeltoft@bloomberg.net, Boris Korby, Adam Cataldo
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