A new survey of U.S. institutional investors finds increasing worry about risk in high-yield bonds, primarily driven by concern about the energy sector.
Fitch Ratings reports that its latest survey found that approximately 61% of respondents believe that high-yield corporate bonds are “modestly or strongly” overvalued. And, 78% of respondents also said they expect fundamental credit conditions in the high-yield sector to deteriorate in the next 12 months, which is up from 61% of respondents who thought so in the September survey.
The rating agency reports that the energy sector is the main source of concern for high-yield bonds. The sector accounts for 18% of outstanding high-yield bonds and is the sector where most investors expect to see deteriorating fundamental credit conditions.
Fitch says it believes that sustained low oil prices will increase defaults among weaker high-yield energy companies over the next couple of years. However, it says that other sectors, such as the consumer discretionary sector, will benefit from low oil prices. In addition, it notes that low prices will also support the broader economy.
This view was echoed in the survey, with roughly 96% of respondents saying the oil price decline will have a neutral, or meaningfully positive, effect on the broader U.S. economy; and, 92% believe it will have a neutral, or meaningfully positive, effect on the overall global economy.
Full results for the survey, which represents the views of 75 senior U.S. credit investors, will be published in the next couple of weeks, Fitch says.