High-yield bond bonanza

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Ethan Wu (0:36)

Pushkin.

Corporate bonds, debt issued by companies, they're red hot right now. Investors are piling in at a record pace. Today on the show, why? This is Unhedged, the Markets and Finance show from the Financial Times and Pushkin. I'm reporter Ethan Wu here in New York, joined from London by the silhouette of Katie Martin.

Katie Martin (1:01)

Yeah.

Ethan Wu (1:01)

How are you doing, Katie?

Katie Martin (1:02)

Listeners may not understand that though, Ethan, but I am sitting in a darkened room. It's just the light has broken. So I do look a bit odd on the screen that Ethan can see me on, but I am here.

Ethan Wu (1:11)

Katie was absolutely blinded by the lights in the London studio, which I guess were brighter today than usual. And she was like holding up her hands to guard her eyes from the harsh lights.

Katie Martin (1:23)

Yeah, it's like, you know that thing where there was the NFT kind of festival in Hong Kong and they put up the wrong kinds of neon lights and a bunch of people went temporarily blind. It was like that, but without the NFTs.

Ethan Wu (1:36)

Something else that is so hot and scouting that is burning my eyes out. It's corporate bonds, Katie. The market is absolutely...

The market is absolutely roaring.

And I think to talk about what's going on in that market, we have to do some terminology because unlike stocks, I think this is a market that gets, you know, maybe a little bit less attention and has terminology that people maybe are a little bit less familiar with. So we talk mostly about treasury bonds, right? Bonds issued by usually the US government, but you know, we talk about guilts in the UK and other sovereign bonds. That's not what we're talking about today. Today it's corporate bonds. When a company goes to the market and issues some paper.

Katie Martin (2:15)

Yeah, when they basically issue IOUs out to the market and so fund managers can buy them, they are guaranteed a certain rate of return through what we call a coupon. And that translates into a certain overall rate of return where you kind of mix up the price at which you buy the bonds and the level of the coupon and you get what you call a yield.

And a lot of this is stuff that most people don't need to know, but the point is that for people who are holding these bonds and people who are buying new bonds that hit the market, it's really quite lively out there.

Ethan Wu (2:51)

And one thing about the corporate universe is there are a lot more companies than there are governments. So there's a lot of different levels of company financial stability, also kind of like governments. You do want to lend to the US, you don't want to lend to Argentina.

Similarly, you probably do want to lend to Apple or Microsoft, but maybe you're kind of iffy about lending to that brand new tech startup that's sort of on its last legs.

And so corporate bonds, broadly speaking, are grouped into two universes of credit worthiness. You've got your so-called investment grade bonds, that's your kind of blue chip rock solid companies with a very low history of defaults on the bonds. And then you have your so-called high yield, they're also known as junk rated. And that's your companies that are maybe a little shakier, have a little bit more default history, or their balance sheets don't look so healthy, or they've had some bad quarters recently, or something along those lines.

And there's lots of gradations within those two categories, but broadly speaking, when you talk about corporate bonds, there's two big universes, investment grade or IG and high yield.

Katie Martin (3:51)

Perfect, no notes, Ethan, that's exactly it.

Ethan Wu (3:54)

Locked and loaded. Well, now that we have some of the kind of terminology set up, both of these markets, IG and high yield, are going absolutely bananas.

And you can see that across a variety of metrics, right? You see that in terms of issuance, like the amount of bonds that companies are putting out there on the market. You can see it in terms of investor demand, like how many of those bonds are getting snapped up. You could see it in terms of valuations, like where the bonds are actually trading on the market. And in sort of all those dimensions, there's a lot, a lot, a lot of appetite out there for corporate bonds.