Why everyone wants to lend to weak companies

livemint.com:

Subscribe to enjoy similar stories. Credit investors often talk in euphemisms. The safest bonds, with the highest credit ratings and hence the lowest yields, are almost always referred to as “high-grade" rather than “low-yield".

Conversely, the riskier stuff, where defaults are more likely, is politely dubbed “high-yield" rather than “low-grade". Recently, though, the yield on supposedly high-yield bonds has not been all that high. Indeed, on November 24th the spread (or extra yield) enjoyed by investors in American high-yield bonds over that enjoyed by investors in Treasury bonds fell below the spread on fixed-rate residential mortgages for the first time.

Since high-yield bonds have a greater rate of default over the long term, these moves have left investors wondering what is going on. Part of the explanation is that the spread on residential mortgages has ticked up. With the Federal Reserve cutting interest rates, investors have moved to price in the risk that mortgage-holders refinance their debts.

However, the more dramatic action has been in high-yield credit spreads. The spread over Treasuries on high-yield bonds fell from 3.7 percentage points at the start of the year to 3.2 this summer. Since September it has fallen to just 2.6 points.

It is now near the record lows reached just before the global financial crisis of 2007-09 (see chart 1). The comparison is not entirely like-for-like. Since the financial crisis, private credit has boomed (see chart 2), with funds lending directly to firms rather than doing so through publicly traded bonds.

The industry tends to take on the most desperate borrowers, meaning that such companies are no longer pushing up yields. Yet the shift does reflect fast-changing sentiment. It