High-yield debt is diverging from investment grade at about the most since December 2009 on signs the U.S. economy is slowing and Europe’s debt crisis is worsening.

The gap between relative yields on junk bonds and investment grade reached 502 basis points yesterday and was as wide as 530 basis points on Aug. 11, the most since Dec. 1, 2009, Bank of America Merrill Lynch index data show. The difference has soared from this year’s low of 301 basis points.

Investors are wagering that the riskiest companies may struggle to obtain capital as unemployment in the U.S. persists above 9 percent in all but two months since May 2009 and as France and Germany seek to contain the euro debt crisis by backing a plan for national balanced-budget amendments. Junk bonds have lost 3.77 percent this month, the biggest monthly decline since November 2008, Bank of America Merrill Lynch index data show.

“We’re dancing on the head of a pin on whether we’re going to stay in a growth mode or whether we slip back into a recession,” said Tim Donahue, head of high-yield bond and leveraged-loan capital markets at JPMorgan Chase & Co. in New York. “There was a loss of confidence in Washington to be able to solve any of these problems.”

Funds that invest in high-yield bonds, rated below Baa3 by Moody’s Investors Service and lower than BBB- at Standard & Poor’s, reported outflows of $3.4 billion last week, according to a JPMorgan report.


Sales Tumble
Speculative-grade companies are on track to sell the lowest monthly volume of bonds since December 2008, having issued about $1 billion of the notes this month, according to data compiled by Bloomberg.

The extra yield investors demand to hold junk bonds rather than government debt reached a high this year of 739 basis points on Aug. 11 before declining to 711 as of yesterday, according to Bank of America Merrill Lynch’s U.S. High Yield Master II index. Spreads on investment-grade bonds climbed as high as 209 basis points on Aug. 11 and were at the same level yesterday, according to the lender’s U.S. Corporate Master index.

Slowing job growth and a weakening economy were among reasons cited by Federal Reserve policy makers last week in their decision to keep the benchmark lending rate near zero “at least” through mid-2013.

The economy grew at a 1.3 percent pace in the April-June period, the Commerce Department reported last month, and consumer spending rose 0.1 percent, the smallest gain since the second quarter of 2009. Unemployment was at 9.1 percent in July, according to the Labor Department.

“High-yield is sensitive to macro-economic growth,” said Eric Gross, a credit strategist for Barclays Capital. “Until we see unemployment meaningfully tick down and the economy get back its footing, we are likely to see continued volatility.”

Bloomberg News

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