Telecom High-Yield Bonds Saw Huge Selloff In September, Surpassing Energy And Metals & Mining

• September was a terrible month for high-yield bonds in general, which produced their lowest return since June of 2013.
• The biggest losers among major high yield industries are no longer Energy or Metal & Mining bonds, but Telecom bonds.
• The high yield market expects a 5.6 percent default rate in the next 12 months to come, considerably above Moody’s 3.4 percent forecast, Marty Fridson Chief Investment Officer of Lehmann Livian Fridson Advisors explains in an article published on LCDcomps.com

Over September, the BofA Merrill Lynch US High Yield Index lost 2.59 percent, marking its worst month since June of 2013. Over the whole third quarter, the Index was down 4.9 percent. In fact, the high-yield market retrieved negative over the whole year, although August was essentially flat at 0.07 percent. The total loss currently amounts to at 2.53 percent.

The article goes on to explain that, on the other hand, the BofAML High Yield Index’s option-adjusted spread (OAS) surged in September from 570 bps to 662 bps. “That widening of the credit spread probably reflected to a considerable extent the widespread fears of illiquidity in the event of a rise in interest rates. A resulting flight to quality drove down Treasury yields (…) Treasury returns increased as maturity lengthened, except that the ten-year return exceeded the 30-year return. Evidently, investors did not view maximum-duration Treasuries as the safest of all possible havens,” the note expounds.
“In high-yield, the relationship between return and maturity was the opposite of the pattern in Treasuries. The longer the paper, the lower was the return, with the longest maturities (15-plus years) winding up out of line. Underlying those figures, OAS increased the most (119 bps) in the shortest maturity bucket and the least (46 bps) in the longest maturity bucket, but as a matter of basic bond math the impact of a one basis point rise in yield increased as maturity lengthened.”

A Sectorial Look

Looking at the return ranking of major industries (see table below), one thing comes to light: August’s two worst performers, Energy and Metals & Mining, improved slightly, but remained close to the lower end of the ranking. Conversely, Telecom bonds fell substantially, and were the worst performers last month.

Source: LCDcomps.com; S&P

The most dramatic event in the Telecom industry was “a plunge in Sprint bonds following a Moody’s downgrade from B2 to Caa1,” Fridson assures. “That large issuer’s decline did not distort the overall performance of the telecom sector, however. Bonds of seven other Telecom issuers posted total returns of –5% or lower in September, with the Wireline, Wireless, and Satellite subindustries all represented among those severely underperforming companies.”

Despite this, the Telecom sector remains on its fair value line, the analyst adds, “with its cheapness versus its ratings justified by the worst ratings prospects in the peer group.”

Disclosure: Javier Hasse holds no positions in any of the securities mentioned above.