A recent deterioration of prices in commodities including natural gas and oil has weakened the high-yield bond market in the first half of the financial year. The falling prices have knocked the corporate bond market, continuing to weaken it after a winter of falling fuel and commodity rates. The weak prices of fuel have caused widening in yield spreads within the energy sector, but it is the high-yield bond market that has analysts worried. Some analysts have argued that the drop in commodity prices combined with shrinking liquidity and overheated prices could cause a dangerous storm within the high-yield bond market.
The response to the increased prices has been for energy firms to lower their outlooks in the near term. This has cause investors to offload positions within affected companies as damage control. This move is said to preserve cash against any further drops in commodity prices. The default outlook for the US high-yield market was increased from 1.5%-2% to 2.5%-3% by Fitch Ratings, stating that this was a reflection of the decline in oil and fuel prices, as well as a sharp reduction in the demand for low-grade coal and overburdening regulations on mining and energy companies during the first half of the year.
The year has been difficult for energy firms in the US, with some firms declaring bankruptcy as a result of the poor performance of the market. Conditions have been so volatile for these companies that they comprised nearly 57% of the 35 high-yield bond issuers that defaulted during the first two quarters, and 3.7% of the overall market. According to Fitch Ratings, things are only going to get worse as the year goes on, with default rates projected to reach 6%-7% in the current cycle, meaning that if the market trend continues as it has set out, it will be hard times ahead for energy companies.