By Kate Duguid and Megan Davies
NEW YORK (Reuters) - High-yield U.S. bonds suffered more pain on Thursday as major junk bond exchange-traded funds fell to the lowest level since February 2016 and an index for credit insurance protecting against exposure to junk bonds widened to a nine-year high.
Investors are increasingly concerned the coronavirus outbreak will hit U.S. corporate cash flow if it keeps workers at home or prevents companies from paying employees.
The Markit high-yield credit-default swap index <CDXHY5Y=MG> - widely used as a gauge of sentiment about high-yield debt - surged to its highest since November 2011.
The price of the SPDR Bloomberg Barclays High Yield Bond ETF fell to the lowest since February 2016 <JNK.P>, as did the iShares iBoxx High Yield Corporate Bond ETF <HYG.P>.
Closed-end high-yield bond funds also fell on Thursday, notching far larger moves than the broader high-yield market. Closed-end funds have leverage associated with them and saw larger outflows from investors wary of risk.
"The reason (closed-end funds) go down faster is because they're levered," said Andrew Brenner, head of international fixed income at NatAlliance Securities.
"In down markets, these things get hit pretty hard. And this is a down market."
The DoubleLine Income Solutions fund <DSL.N> was down 9.7% while the PGIM High Yield Bond Fund <ISD.N> was off 6.3%. Credit Suisse High Yield Bond Fund <DHY.A> was down 5.98%, and the Barings Global Short Duration High Yield Fund <BGH.N> had dropped 6.79%.
Investor worries about the coronavirus' effect on companies' cash flow has mounted enough that it has begun to affect the investment-grade market as well, a high-grade sector that can function as a haven in times of market volatility.
New high-yield bond issuance has been tepid for the past three weeks, as issuers pull deals and investors shun risk. But the market for investment grade issues was active until Wednesday.
"Up until yesterday, the IG market was still open and deals were still getting done. It's only within the last 24 hours even that market has also slowed," said David Leduc, active fixed income chief investment officer at Mellon.
Some companies have begun to draw on credit lines for fear that capital markets may be closed to them for the time being.
Boeing Co <BA.N> is planning to draw down the rest of a $13.8 billion loan it agreed last month, a source told Reuters on Wednesday. Bloomberg reported that Hilton Worldwide plans to draw down a portion of its $1.75 billion loan.
There will be more such announcements, said Leduc, from companies in sectors directly hit by coronavirus including travel, leisure and energy, which expect to see a hit to earnings. Companies with debt maturing in the coming few quarters may also draw down loans.
The commercial paper market, which provides companies with short-term funding, has not yet seen a consistent slowdown in issuance, though the cost to borrow has risen this week, according to Federal Reserve data.
(Reporting by Kate Duguid, writing by Megan Davies; Editing by Chizu Nomiyama, Nick Zieminski and Tom Brown)