Bond Traders Aim to Separate Distress from Doom
Buying debt from the riskiest U.S. companies is treacherous, but the yields are too tempting to ignore.
Bargain hunting.
Photographer: Mark Makela/Getty Images
If bond traders’ performance in the second quarter of 2020 was about buying into an indiscriminate rally in all corners of the debt markets, the second half of the year could be defined by sorting out the companies that are merely distressed from those that are ultimately doomed.
Investment-grade bonds have become almost a commoditized asset class, given the Federal Reserve’s $750 billion pledge to purchase a broad index of securities to support “market functioning” and provide direct financing to companies as a last resort. Investors have grown so comfortable with this arrangement (which is supposed to end after September but could easily be extended) that the average yield on high-grade corporate debt fell below 2% on July 16 for the first time in the 48-year history of Bloomberg Barclays data. If policy makers succeed in reviving the U.S. economy, that might not even cover inflation.