Junk bond traders turn oil traders as markets converge

The fortunes of junk-bond traders have never been more closely linked to oil. The high-yield bond market has been rallying since February 11, the exact day that oil reached a bottom.

Prices on the bonds of speculative-grade energy companies are always linked to oil, but in recent weeks, credits outside that industry have also been moving with the commodity.

The correlation of the returns of non-energy junk bonds with oil is at all-time highs, according to Deutsche Bank strategists. Usually there’s little real relationship between the two.

Non-energy junk bonds make up about 88% of the market, according to Bank of America Merrill Lynch index data. That tight linkage may mean investors are not paying enough attention to growing risks among junk bond issuers, according to Bank of America Corp strategists.

The recent rally “will ultimately fade,” strategists led by Michael Contopoulos said on Tuesday. There are signs that credit quality is getting worse among US high-yield issuers, not better.

So far this year, the ratio of ratings upgrades to downgrades is the lowest since the first quarter of 2009, which was during the financial crisis.

Corporate bankruptcy filings are at the highest level since 2014, according to data compiled by Bloomberg. Growth in earnings before interest, taxes, depreciation, and amortisation has been slowing for US companies.