CE Bank of America index data show. Investors have raced one another to lend billions of dollars to cruise companies and airlines even as they bleed cash. The amount of U.S. junk-rated debt included in the Bloomberg Barclays U.S. High Yield bond index has surged to a record face value of $1.53 trillion from $1.2 trillion in October 2019.
“Ratings agencies have become comfortable with higher and higher leverage, thus companies are more and more happy to take advantage of it,” Noel Hebert, director of credit research at Bloomberg Intelligence, said in a recent article. “There’s an incentive to hold leverage at elevated levels because there’s no real mechanism that’s punishing you.”
It’s easy to look at these valuations paired with more leveraged balance sheets and say risk is being mispriced. Some companies will default, perhaps unexpectedly, even if credit seems priced to perfection now. And yet these yields and low perceived risk of default make perfect sense. In fact, there’s a case for some of these bond yields to go lower.