Yield-Hungry Investors Pile Into Junk Bond Market As Companies Raise Record $140 Billion

In a rush to secure cheap cash, companies have issued a record $140 billion in the US junk bond market in the first quarter of 2021, significantly exceeding the record set during the onset of the pandemic.

According to data collected by Refinitiv, the record-low borrowing costs that have become a staple of the economic recovery have even allowed riskier borrowers to take advantage of cheap cash to pay for acquisitions, refinance existing debt, and even give their owners dividends. However, the latest debt issuance is also a sign that the economy has come a long way since its collapse a year ago, when high-risk assets faced scrutiny during a time of heightened market turbulence.

The three largest record-breaking issuance quarters have all occurred within the past year, pushing the US high yield market up from $1.2 trillion since the beginning of 2020 to a historic $1.5 trillion, according to Ice Data Services. The enormous debt issuance signals that companies will have more debt that will need to be refinanced at a later time, which is anticipated to boost future issuance volumes.

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Investors have been buying up junk bonds as low interest rates make riskier markets and higher yields appear more attractive. In fact, just this week, cruise ship operator Royal Caribbean successfully raised $1.5 billion towards refinancing debt that was approaching its due date, while simultaneously burning through a whooping $0.25 billion each month that its ships remain idled amid the pandemic.

Similarly, major US retailer Neiman Marcus, which collapsed amid the pandemic, was able to raise $1.1 billion towards refinancing the loans that put the company out of bankruptcy. The resurgence in demand for high-yield bonds even granted some companies the opportunity to give their owners a payday boost. Liberty Latin America, a communications company, successfully raised $820 million in the past week to allocate $250 million to shareholders and pay down its debt.

However, the junk bond party may be short-lived. Some market analysts are beginning to raise alarm over increasing inflation expectations and the impact on government bonds, which would subsequently drag down the the junk bond market.

Information for this briefing was found via the companies mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.