Tally of distressed bonds in Morningstar US High-Yield Bond Index falling in Q3

This is the first of what will be a regular analysis of bonds in the Morningstar US High-Yield Bond Index that are trading at least 1,000 basis points above the 10-year U.S. Treasury yield, a level commonly considered distressed.

The number of high-yield issuers and issues in the Morningstar US High-Yield Bond Index trading at distressed levels (defined as 1,000 basis points or more above Treasuries) on Aug. 17 was down markedly from the total at the end of the second quarter, clearly reflecting the high-yield market rally that began July 1.

Specifically, 121 bonds belonging to 85 issuers in the Morningstar index were trading at distressed yields, versus 203 bonds sold by 139 issuers on June 30. The 39% decline in issuers and 40% drop in issues come as the option-adjusted spread of the index tightened to 418 basis points off the curve, from 570 bps at the end of the June quarter.

The par value of issues trading at distressed levels on Aug. 17 was $83.2 billion, 43% below the second quarter-end figure. Those issues’ market value is $52.8 billion, 47% below the June 30 level. The greater decline in market value than par value is reflected in the resultant weighted average price of the distressed bonds in the index — 63.47 on Aug. 17, versus 68.42 on June 30 — highlighting the currently greater degree of distress among those bonds trading at distressed levels than at quarter-end.

The Aug. 17 average price of the distressed subset is still higher than the 61.27 average price on March 31. The weighted average yield to worst of the distressed subset on Aug. 17 was 23.96%, 521 bps below the March 31 level.

The healthcare sector dominates the distressed subset of the Morningstar US High-Yield Bond Index, accounting for 22% of the distressed bonds as of Aug. 17. Most of those bonds were issued by pharma companies. Energy issues were second, at 12.4%. Retail and basic industry issues were tied for third place, both at 11.6%.