Investors Flock to CCC Junk Bonds for 0.75% Gain as Risk Appetite Rises

Investors in the U.S. are increasingly turning to junk bonds, particularly those rated CCC, despite warnings from prominent figures in the financial industry. These bonds, which are at the bottom tier of speculative-grade credit, have seen a return of 0.75% this month, outperforming other classes, including investment-grade bonds. This shift comes as concerns over trade policies have diminished, and investors are more willing to take on risk for higher yields.

BB-rated bonds, which are at the top of the junk bond spectrum, have underperformed this month. Earlier in the year, these bonds were seen as a safer bet due to trade policy uncertainties, but that perception has changed. Investors are now more comfortable reaching for riskier assets, as evidenced by the strong performance of CCC-rated bonds.

Robert Tipp, chief investment strategist at PGIM Fixed Income, noted that investors are becoming more comfortable with risk, leading them to favor CCC-rated bonds over BB-rated ones. However, not all industry leaders are convinced by this trend. Jamie Dimon, CEO of JPMorgan Chase, recently expressed concern that credit spreads are "a little unnaturally low." He had previously stated that he would not be buying credit if he were managing a fund.

Jeff Gundlach, CEO of DoubleLine Capital, also shared his caution, stating that his firm has its lowest ever allocation to high-yield bonds due to concerns about valuations not reflecting actual risk. This sentiment is echoed by more cautious investors who are pulling out of junk bonds entirely and moving up to BBB investment-grade bonds. The yield gap between BB and BBB bonds has narrowed significantly, making BBB bonds an attractive alternative for investors seeking a decent spread without the added risk of BB bonds.

Another factor affecting the junk bond market is the influx of "fallen angels"—companies that have been downgraded from investment-grade to junk status. Warner Bros. Discovery is a recent example, with its planned split into two businesses triggering a downgrade and adding billions of fresh debt to the BB market. This influx can cause technical dislocations, as managing director Kelly Burton of Barings noted, requiring careful assessment of how well these new issuances can be absorbed by the market.

Meanwhile, U.S. banks are making strategic funding decisions post-earnings season. JPMorgan Chase opted to issue domestic investment-grade bonds, while Wells Fargo and Citigroup targeted European investors before considering the U.S. market. In other corporate developments, China Vanke is extending its domestic bank loans to ease cash pressure, and CEC Entertainment is seeking $600 million from equity investors to manage upcoming debt obligations after failing to raise funds through the junk bond market.

In the broader corporate landscape, Alimentation Couche-Tard withdrew its takeover bid for Seven & i Holdings after nearly a year of pursuit. LifeScan Global Corp., backed by Platinum Equity, filed for bankruptcy protection and reached an agreement with creditors for debt relief. Zayo Group Holdings is in talks with creditors to extend the due dates on part of its multibillion-dollar debt, aiming to gain some breathing room in a tightening credit environment.