January 14, 2016 / 3:52 PM / 2 years ago

U.S. energy junk bond spreads at record width

(Reuters) - The premium demanded by investors for holding U.S. high-yield energy bonds instead of safer U.S. Treasury securities hit the widest point ever on Wednesday as oil prices dipped below $30, raising the risk of yet more defaults in the sector.

Rising risk premiums on junk bonds have stoked worries among some analysts and bond investors the U.S. economy may slip into a recession in the next 12 months. Martin Fridson, a widely-followed veteran strategist, said there is a 44 percent chance of a U.S. recession within the next year.

Data from Bank of America Merrill Lynch fixed income indexes show that yields on junk debt issued by the energy industry now stand at 1,547 basis points above those on comparable Treasuries, after widening by 46 basis points on the day on Wednesday, the biggest increase in nearly a month.

That spread now exceeds the previous record of 1,525 basis points set during the financial crisis in December 2008.

Other industries that have raised money in the high-yield market have also seen risk premiums on their bonds rise due to worries about weakening global economy and further U.S. interest rate hikes.

Yield premiums on basic industry junk bonds grew to 979 basis points over Treasuries from 969 basis points on Tuesday, while those on high-yield transportation debt expanded to 877 basis points, 9 basis points wider on the day.

Nervousness about junk bonds recording another dismal year has led investors to pull money from this sector in favor of less risky government bonds.

U.S.-based high-yield bond funds saw $809 million outflows last week, while government-Treasury funds pulled in $93 million, according to Lipper, a unit of Thomson Reuters.

The iShares iBoxx high-yield exchange-traded fund has fallen 1.2 percent on a total return basis since the start of 2016 after a 5.6 percent loss in 2015.

As stock market turbulence will likely persist until fears about China subside and crude prices stabilize, it is unclear whether bloated yield spreads on junk bonds portend a looming U.S. recession, some analysts said.

Stan Shipley, a strategist at Evercore ISI, pointed out ballooning junk bond spreads were false recession signals in 2002, 2005 and 2011. He added the current widening in spreads has been driven by four industries: energy; steel, mining and paper.

“The fear of a recession is probably overstated in capital markets and should quickly dissipate once there is some clarity in China’s outlook and a floor for crude oil prices,” Shipley wrote in a research note published on Thursday.

Reporting By Dan Burns; Editing by Alistair Bell

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