C&B Notes

One Way Ladder

In one of the clearest signs of yield chasing in the current low interest rate environment, the “yield-to-worst” measure for the domestic high-yield market hit a new low last week.  When investors put yield considerations ahead of principal protection, the result is, too often, permanent impairments of capital.

The 5.56% level, reached on the Barclays High Yield Index on Tuesday, was below the previous record of 5.61% set on January 24.  With interest rates hovering around record lows, investors have found themselves rushing down the credit ladder in search of bonds offering more return — and more risk.  CCC rated bonds — the riskiest investments at the very bottom of the credit spectrum, just one notch above default level — have rallied the most.  “It’s definitely risk-on behavior, where you are trying to get exposure to the most yield possible,” said Drew Mogavero, head of U.S. high-yield trading at Barclays.  “The safer segments of the market, BBs, have rallied to pretty low-yielding levels,” he said.  “So people are looking out to CCCs and other higher-yielding names.”   Yield-to-worst indicates the lowest potential yield on a bond without the issuer defaulting.