Regulatory unease at high-risk bonds

Record sales of high-yield payment-in-kind bonds is triggering uneasiness among international regulators who are concerned investors may suffer losses when central banks tighten monetary policy.

Issuance of the notes, which give borrowers the option to repay interest with more debt, more than doubled this year to $16.5bn (€12bn) from $6.5bn (€4.7bn) in 2012, according to data compiled by Bloomberg. About 30% of issuers before the 2008 financial crisis have since defaulted, the Bank for International Settlements said in its quarterly review.

Companies are taking advantage of investor demand for riskier debt as central bank stimulus measures suppress interest rates and defaults approach historic lows. The average yield on junk-rated corporate bonds fell to a record 5.94% worldwide in May, Bank of America Merrill Lynch index data show, while global default rates dropped to 2.8% in October from 3.2% a year earlier, according to a Moody’s report.