Additionally, strategists led by Michael Contopoulos argue that the recent rally “will ultimately fade.” As junk bonds rebound on the improving energy environment, the speculative-grade debt market may decouple from the commodity.[related_stories]
Specifically, some believe market fundamentals will soon begin to take a larger toll on junk bonds. So far this year, the ratio of ratings upgrades to downgrades is the lowest since the first quarter of 2009, suggesting that credit quality is worsening among U.S. high-yield issuers. Corporate bankruptcy filings are at the highest since 2014. Growth in earnings before interest, taxes, depreciation and amortization has also been slowing.
Furthermore, higher oil prices could pave the way for new risks, notably increased costs in manufacturing and transporting goods.
“In the longer term, what’s important to remember is that higher oil prices aren’t necessarily good for the rest of the market,” Gershon Distenfeld, director of high yield at AllianceBernstein, told Bloomberg.
SPDR Barclays High Yield Bond ETF