Selloff in Complex Investments Flashes Warning for Junk Bonds


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Maggie Wang
David Preston
Angie Long
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Matt Wirz

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The New York Times
SOURCE: https://www.wsj.com/articles/clo-selloff-flashes-warning-sign-to-junk-bond-market-11573477203?mod=hp_lead_pos4
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Summary

But recent declines, especially last month, erased most of the gains, giving holders a roughly 1% return this year through October.That contrasts sharply with high-yield bonds: Many of the same companies to which CLOs lend issue junk bonds, which returned about 12% this year through October, according to data from S&P Global Market Intelligence.“If you think that double-B CLOs are giving a warning sign, that says something about high yield,” said David Preston, head of CLO research at “It’s hard to see how both markets can be right.”Double-B CLO bond yields, which fall as prices rise, are about 5 percentage points higher than the yield of comparably rated junk bonds, according to data from Palmer Square Capital Management, which manages and invests in CLOs. The yield differential hasn’t been this wide since early 2016, when dropping oil prices sparked a selloff in both leveraged loans and high-yield bonds.To be sure, the disconnect between CLO bonds and high-yield could reflect an overreaction in the CLO market.

As said here by Matt Wirz