(Jan 25): Some of the best performing US debt in the first weeks of this year is the lowest rated, implying that corporate defaults are low on the list of investor fears now.
Debt rated in the CCC tier, the lowest ratings that commonly trade in the US, gained 1.15% this year through Thursday’s close on a total return basis. That’s better than just about every other kind of US debt, including other types of junk bonds. Treasuries are down about 0.2%, according to Bloomberg index data.
Some of the demand may be bargain hunting. According to Barclays, CCC debt is cheap by historical standards, based on the ratio of risk premiums for the bonds to the tier just above, in the B range. CCC outperformance this year comes after the bonds lagged other kinds of junk debt in 2025, gaining 8.3% last year while BB notes, for example, gained 8.9%.
“We believe the outperformance is because of market valuations,” said Sean Feeley, a high-yield portfolio manager at Barings. “The underlying economy is strong.”
The performance of the CCC part of the junk market is particularly important for junk bond investors, because it has an outsized impact on overall returns. According to Barclays, CCC notes account for about 12% of the high-yield index’s market value, but about a quarter of the spreads for the index.
“If you don’t invest in any CCCs you are going to get left behind,” said Michael Levitin, portfolio manager at MidOcean Partners.
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The returns are coming at a time of growing disquiet in bond markets. Yields rose around much of the world this week, hurt by US President Donald Trump’s rhetoric about taking over Greenland, which threatens to undermine the world political order, and a tax cut pledge from Japanese Prime Minister Sanae Takaichi that tanked the country’s government bonds.
Even before the events of this week, US bonds had broadly been showing signs of pressure. The 10-year US Treasury yield has risen about 0.25 percentage point since late November, amid concerns that the Federal Reserve will be slower to cut rates with employment looking relatively strong.
Those rising yields are part of what has driven corporate bond demand in recent weeks. Money managers including pensions and insurance companies often focus on absolute yield levels when assessing investments, and are more inclined to buy when yields are higher.
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They’ve been buying all kinds of corporate bonds. On Thursday, spreads on high-grade US corporate bonds reached 0.71 percentage point, or 71 basis points, the tightest since 1998. In the primary investment-grade market, companies have sold US$170 billion of corporate bonds, up about 13% from the same time last year.
But money managers seem to have particular interest in junkier junk bonds in the US. In addition to gains in the secondary market, there have been six bond sales for CCC tier debt in January, totalling US$3.5 billion ($4.4 billion), about 15% of total high-yield supply. In the first month of last year, there were two sales, totaling US$630 million, amounting to around 3% of junk issuance.
“People want the yield, they need the paper and they have cash,” said MidOcean’s Levitin.
The CCC market is split between better performing securities that are trading at relatively expensive valuations, and bonds at greater risk of default trading at distressed levels, said Corry Short, a strategist at Barclays.
“Because of the degree of dispersion within the CCC segment right now, you have to look through a more narrow lens when trying to identify relative value in CCCs, and it makes credit selection paramount,” Short said.
Investors are broadly making a distinction between companies growing robustly, and those with more limited potential to perform well. Corporations with higher growth might also have strong equity profiles, said Scott Hague, head of global leveraged finance and private credit at TD Securities.
“In this kind of environment, it’s not unusual to see spreads for stronger credits compress to levels normally reserved for comparable single B rated names,” Hague said.
Uploaded by Magessan Varatharaja
