The supply of U.S. companies with junk-rated debt is rising just as investor demand for higher yields is climbing.
Moody's reports a two-year high in company debt rated B3 negative or worse—a.k.a. junk—as part of a trend that has seen the list of 184 companies grow by 26 percent over the period. The rise has been led by oil and gas firms, which accounted for 12 of the 28 additions to the junk list in February.
What's more, the roster would be even longer but for companies falling off the list due to reasons including filing for bankruptcy. Of the 18 issuers no longer rated, 39 percent filed either for bankruptcy protection or "distressed exchange, and 33 percent withdrew, with just 28 percent getting off the list due to upgrades."
"This is a reversal from the previous two quarters, when most companies left the list via ratings upgrades," Moody's said. "If this reversal continues, it could signal tough times ahead for speculative-grade issuers."
Not so far, though.
Fueled by low default rates and generally favorable credit conditions, investors in 2015 have been pouring money into funds that invest in high-yield debt. In fact, the previous six weeks before the most recent week had the highest level of flows to junk funds since the financial crisis in 2008 and 2009, according to Morningstar.
Flows to junk-focused funds have taken in a net $12.2 billion so far in 2015 as part of a broader interest in fixed income amid a turbulent stock market, Bank of America Merrill Lynch reported. In addition to the big cash attraction to junk, high-grade bond funds have seen net inflows of $36.4 billion.
High-yield bonds have outperformed both stocks and fixed income as a whole. The SPDR Barclays High-Yield Bond exchange-traded fund is up 2.3 percent year to date, outpacing the Barclays U.S. Aggregate Bond Index, which is up 1.5 percent, and the S&P 500, which has climbed 1.1 percent for the year, thanks primarily to a big rally Monday.
ETFs that focus on high yield have seen solid inflows. A look at the top 10 funds by asset size, flows and performance for the year: