U.S. Markets

U.S. junk energy index spread widens to three-year high

NEW YORK (Reuters) - Credit investors nervous about the threat the coronavirus poses to the global economy have pulled money out of riskier bonds, widening the spread of U.S. junk-rated energy debt over Treasuries to a three-year high on Tuesday.

The ICE/BofAML U.S. high yield energy index .MERH0EN saw its spread over Treasuries rise to 851 basis points on Tuesday, its highest since August 2016. The move in high-yield energy has come as part of a broader selloff in the high-yield market, with the spread of the corresponding ICE index widening 37 basis points on Monday alone .MERH0A0.

(GRAPHIC: ICE/BofAML U.S. high-yield energy index - )

Energy bonds in particular have been battered in the high-yield selloff as the price of oil has slid. Concern about the demand impact from the coronavirus has pushed Brent crude LCOc1 down by almost $10 a barrel this year.

This week’s selloff exacerbates an existing trend in high-yield energy: prior to Monday, high-yield energy spreads had widened 14.7% since the start of the year. Weak earnings and high leverage in the sector have put investors off, wrote Justin Lenarcic, global alternative investment strategist at Wells Fargo Investment Institute.

In January, 36 of the 50 worst-performing high-yield bonds in the ICE/BofAML high-yield index were energy companies, he wrote, with an average return of minus 14%. The default risk for large U.S. oil and gas firms has risen nearly 6% in the last year, according to Credit Benchmark

A grim outlook for oil prices as coronavirus fears persist will not help. West Texas Intermediate (WTI) crude CLc1 on Wednesday hit its lowest level in a year and is "getting dangerously close to the $45 oil tipping point," wrote analysts from Wolfe Research.

Those losses may be stinging investors who rushed into new junk-rated energy deals at the start of the year after having refrained for much of 2019. The first two weeks of the year brought as many junk-rated energy bond deals as the last half of 2019.

Natural gas producer Range Resources' RRC.N 9.25% bond worth $550 million 75281ABC2= issued on Jan. 24 now trades at 79.5 cents on the dollar. A $750 million offering from offshore driller Transocean 893830BL2=RIGN.S, rated Caa1, the lowest category of junk by Moody's Investors Service, is now trading at 89 cents on the dollar.

Reporting by Kate Duguid in New York; Editing by Matthew Lewis