Via Financial Times

Fears over the impact of the coronavirus outbreak sparked a sharp sell-off in junk bonds on Monday, pushing borrowing costs for the riskiest energy companies to their highest level in more than three years.

The additional yield, or spread, on a widely watched high-yield energy bond index run by Ice Data Services rose to 8.35 percentage points above benchmark US Treasuries, its highest level since August 2016, as investors reacted to news that the virus had spread further in countries from Italy to Iran.

It marked the biggest one-day rise in borrowing costs for these riskier energy companies since an intense bout of selling in early 2016, when surging oil supply undercut prices.

“It’s one of the worst trading days we have seen in recent memory,” said John McClain, a portfolio manager at Diamond Hill Capital Management. “It’s a sanity check for investors. We had the melt-up in December and people have been ignoring the tell-tale warning signs this year.”

The sell-off helped push spreads in the broader junk bond market to the highest level this year, ending a brief reprieve this month as investors started to bet that the virus was under control.

“This has been building and it doesn’t look like it is over,” said Andrew Brenner, head of international fixed income at National Alliance Securities. “This is a fear-driven market.”

Early indications on Tuesday suggested the sell-off in energy bonds had stabilised, with HYG, a high-yield energy bond exchange traded fund run by BlackRock iShares, steady in overnight trading.

Energy companies have been particularly hard hit by fears surrounding the virus due to the dramatic decline in commodity prices and the expected dent to global oil and gas demand. Brent crude prices are down 15 per cent this year to $56 per barrel, with the sell-off intensifying this week.

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Natural gas companies Antero Resources, Chesapeake Energy and Vine Oil and Gas were among the worst hit on Monday. Antero’s bond maturing in 2022 dropped more than 6 cents on the dollar to 69 cents, giving it an indicative yield of over 20 per cent.

Oil-focused companies such as Oasis Petroleum and Whiting Petroleum also suffered, with Oasis’s bond maturing in 2022 falling about 3 cents to below 90 on the dollar, giving it an indicative yield of more than 12 per cent.