Junkiest Junk Offers Warning Sign for Investors Banking on Debt

For much of the year, money managers have embraced optimism and snatched up corporate bonds, sending valuations to ever more expensive levels.

The CCC widening and underperformance are red flags.

Now, Wall Street titans are saying it’s time to focus on how bad things can get, Josyana Joshua, Eliza Ronalds-Hannon, and Caleb Mutua reported for Bloomberg News.

Jamie Dimon, chief executive officer of JPMorgan Chase & Co., and Josh Easterly, co-founder and co-chief investment officer of Sixth Street Partners, are among those warning that the credit market may not be pricing in enough risk.

And the lowest rung of junk bonds is flashing warnings that the U.S. economy could soon face slower growth, higher inflation, and the possibility of a recession.

Risk premiums on junk bonds rated in the CCC tier have widened 1.56 percentage points this year—and 0.4 percentage point in the latest week. The gap between spreads on CCCs and the next tier above them, Bs, has been widening this year and over the past two weeks, signaling that the weakest bonds are lagging

The CCC widening and underperformance are red flags, said Connor Fitzgerald, fixed-income portfolio manager at Wellington Management, a firm that oversees more than $1 trillion in assets, James Crombie and Dan Wilchins also reported for Bloomberg.