Strange Price Action In CCC Bonds

Marty Fridson, CIO at Lehmann Livian Fridson Advisors LLC – a wealth management fund specializing in income investing, has noticed some peculiar trading action in high-yield bonds in the past week. As risk premiums fell during the weeks of Feb. 11 to March 21, high-yield bonds behaved very predictably, with the lower-rated (higher-risk) bonds outperforming their lower-risk counterparts.

However, after a strong five-week run, bonds sold off during the week of March 21 on fears surrounding the Brussels terrorist attacks and the potential for a Fed rate hike in coming months. The option-adjusted spread (OAS) on the BofA Merrill Lynch High Yield Index had fallen from 8.87 percent on Feb. 11 to only 6.65 percent by March 21, but it spiked back to 6.93 percent by March 24.

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During the most recent downturn, bond performance generally correlated with ratings (the lower-rated bonds were hit hardest), but Fridson notes that the CCC-C rated bonds significantly outperformed B and BB rated bonds.

Fridson attributes this strange market action to an overly-pessimistic view on CCC-C rated bonds prior to the downturn.

“The CCC-C category was much wider on March 21 than was customarily the case when overall risk was at the same level as on that date,” Fridson explains. “That may have shown that investors held an unduly pessimistic view, so that when the market-wide risk premium increased between March 21 and March 24, a smaller adjustment was needed for CCC-Cs than for the other rating categories.”

So far this year, the iShares iBoxx $ High Yid Corp Bond (ETF) HYG is up 1.1 percent.

Disclosure: the author holds no position in the stocks mentioned.