May 2 (Reuters) - Spreads on U.S. high yield bonds, or the premium companies pay over U.S. Treasuries, remain tight despite a pick-up in distress within the asset class, as investors see the majority of issuers weathering higher-for-longer interest rates.
Elevated rates and persistent inflation have eaten into the bottom lines of many U.S. corporate borrowers, particularly those with high leverage and lower credit ratings.
The dollar volume of defaulted debt rose to over $33 billion in the first quarter from roughly $19 billion in the fourth quarter of 2023, according to a Monday report by Moody's RatingsIn addition, the default rate among junk-rated borrowers came in at 5.8% over the last 12 months, its highest in three years, Moody's noted.
High-yield bond spreads widened 3 basis points on May 1 but they have tightened 33 basis points so far this year, according to the ICE BofA High Yield index.
Distressed exchanges continue to play a significant role in these defaults. There have been $12.8 billion in distressed exchanges so far this year, on pace to beat out the $35.2 billion record high reached in 2008, according to a Thursday research note by JPMorgan.
The volume of distressed exchanges so far in 2024 accounts for half of all default volume, also on pace to be the highest percentage on record.
Despite a pickup in distress, U.S. high-yield spreads have narrowed in recent weeks. The ICE BofA High Yield Index Option-Adjusted Spread stood at 3.21% on Wednesday, down 21 basis points from their April high of 3.42%.
"Some of the companies that have defaulted either technically or actually entered bankruptcy thus far in the credit cycle are the ones that were weaker fundamentally heading into this cycle," said Sinjin Bowron, portfolio manager and head of high yield and leveraged loan strategies at investment firm Beach Point Capital Management.
"So there haven't been any real surprises in the market yet, and I think that's one reason why spreads have been generally range-bound over the past several months," he said.
Treasury bonds rallied on Thursday following Fed Chair Jerome Powell's Wednesday remarks that while the central bank was unlikely to raise rates further, they could potentially remain steady in the 5.25% to 5.50% range that has been in place since July as inflation remains persistent.
High-yield bonds have provided a yield to maturity of 8.18% so far this year, according to the S&P U.S. High Yield Corporate Bond Index.
"Obviously any increase in default distress is concerning," said Andrew Bellis, head of private debt at private equity firm Partners Group.
"But I think if you have to put it in comparison with where you're coming from, the overall returns in the asset class are still very attractive," he said.
Reporting by Matt Tracy; Editing by Josie Kao
