Since the crash of 2008, markets have reset and reorganized, leading to historic highs for equities. We have also seen the return of the philosophy of “risk as yield” instead of “risk as risk.” Nowhere is this more evident than the surging taste for junk bonds in the last seven years. Businesses teetering on the brink of bankruptcy have found ample sources of capital as the world’s pension funds have sought additional alpha.
The trends now show a shift in this dynamic. Look at this trend of junk bond yields in the secondary markets. True, subprime bonds are also increasing in yield – but clearly the markets are beginning to price in actual risk of default.
High-risk energy companies make up a sizable portion of the junk bond market, and with oil teetering near $30 a barrel, this could destabilize the pricing of junk bonds even further.
As the financing for many different kinds of companies change so dramatically, look for competitive dynamics to shift in a variety of industries in 2016.