Risk-on fever hits junk bonds despite warnings from Jamie Dimon and others

Junk debt buyers in the U.S. are ignoring warnings from some of the biggest names on Wall Street and pouring money into the riskiest bonds on the market.

CCC-rated bonds, the absolute bottom tier of speculative-grade credit, have returned 0.75% this month through Thursday, outperforming every other class, including investment-grade bonds, according to data from Bloomberg.

At the same time, BB-rated bonds, which sit at the top of the junk heap, have delivered the worst performance of any speculative debt tier. That’s a major reversal from earlier in the year when fears over President Donald Trump’s trade policies made BBs the safer bet among junk names.

But those concerns have faded fast. Stocks keep setting new highs, and investors clearly feel more comfortable stepping down the ladder to chase bigger yield.

BB bonds lose ground as traders look elsewhere

Robert Tipp, who serves as chief investment strategist at PGIM Fixed Income, said it directly: “As investors have become more comfortable, they’ve begun to reach for risk.” That comfort is showing up in a big way as market players drop BBs and scoop up CCCs without flinching.

But Jamie Dimon, the CEO of JPMorgan Chase, isn’t buying the hype. This week, he said credit spreads are “a little unnaturally low.” That comment came just one month after he said that if he were managing a fund, he wouldn’t be buying any credit at all.

Over at DoubleLine Capital, Jeff Gundlach, the CEO, said last month that his firm has “its lowest ever allocation” to high-yield bonds. The reason? He doesn’t believe the valuations reflect the actual risk.

There’s also a change happening in the other direction. More cautious buyers are pulling out of junk entirely and sliding up the scale to buy BBB investment-grade bonds. The yield gap between BB and BBB bonds has narrowed to just 75 basis points, way below the ten-year average of 120. That means investors don’t need to hang around BB territory to get a decent spread.

There’s also a technical risk hitting BBs from another angle, the so-called “fallen angels.” These are companies that used to have investment-grade ratings but got bumped down into junk status. Warner Bros. Discovery is one recent case. 

Its planned split into two separate businesses triggered a downgrade and dumped billions of fresh debt into the BB market. Kelly Burton, managing director at Barings, said, “When big names come our way we need to determine how well these names can be digested and whether it will cause a technical dislocation.”

New moves from banks and stressed companies shake the credit scene

While junk buyers chase yield, U.S. banks are making strategic funding decisions after earnings season. JPMorgan Chase chose to go directly to the domestic investment-grade bonds market. But Wells Fargo and Citigroup took a different route. They went after European investors first, holding off on their U.S. bond sale.

In China, real estate giant China Vanke is now trying to extend its domestic bank loans by up to ten years. That move is supposed to reduce pressure on its cash position, which has been under strain for months. Meanwhile in the U.S., CEC Entertainment, the company behind Chuck E. Cheese, is in talks with its equity investors for $600 million. The goal is to handle upcoming debt obligations after its attempt to raise funds through the junk bonds market failed.

In Canada, Alimentation Couche-Tard just walked away from a ¥6.77 trillion ($45.8 billion) takeover bid for Seven & i Holdings. After nearly a year of pursuit, the Japanese company that runs 7-Eleven stores apparently refused to engage in serious talks, forcing Couche-Tard to step back.

Back in Texas, LifeScan Global Corp., which makes glucose monitors and is backed by Platinum Equity, filed for bankruptcy protection. The company reached an agreement to hand over control to creditors in exchange for debt relief.

Lastly, fiber-network provider Zayo Group Holdings is close to finalizing a deal with its creditors to extend the due dates on part of its multibillion-dollar debt pile. The agreement is still tentative, but it could give Zayo some breathing room in a tightening credit environment.

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