Yields on Junk Bonds Surge as Stocks Tumble

Wall Street’s sudden case of nerves is affecting more than technology stocks.

Corporate junk bonds, which soared in value last year and for much of January, also are suffering heavy profit-taking.

And Treasury bonds, which normally would be expected to benefit from selling in other markets, got no lift on Wednesday despite the stock market’s fall.

In the junk market, the average yield on an index of 100 junk bonds tracked by KDP Investment Advisors rose to 7.1% on Wednesday, highest since Jan. 2 and up from 7.04% Tuesday.

The average junk yield had dropped to 6.55% by Jan. 22, the lowest in more than 20 years.

The junk bond market -- meaning debt of companies rated below investment grade -- typically rises and falls in tandem with the stock market.

The junk market also can be particularly volatile because it is a favorite of traders who can quickly rush in and out.

By contrast, the problem for the Treasury bond market is partly one of supply, analysts said: Treasury yields inched up Wednesday after the government detailed plans to borrow $56 billion next week to help fund the record federal budget deficit.

The bellwether 10-year Treasury note ended at 4.11%, up from 4.10% on Tuesday. The yield has risen from 3.96% on Jan. 22, although it was as high as 4.19% last week.

Many Treasury investors are nervous because of the government’s mammoth borrowing plans, and because of the recent stream of generally upbeat economic reports. A robust economy this year could force the Federal Reserve to tighten credit sooner rather than later.

“The economy is going strong, U.S. companies are coming in with better earnings and the government is borrowing more,” said Ken Anderson, who helps manage $65 billion of bonds at Evergreen Institutional Asset Management in Charlotte, N.C. “I’m not a bull with a 10-year Treasury at this level.”

The Treasury next week plans to sell $24 billion of three-year notes, $16 billion of five-year notes and $16 billion of 10-year notes. The offerings are one chunk of an expected record $177 billion in net government borrowing in the first quarter.

“It’s unprecedented this much supply is coming into the market -- obviously that’s got to get placed somewhere,” said Andrew Lombara, a trader at HSBC Securities in New York.