Displaying items by tag: high yield

(New York)

Bond investors are getting nervous, and not about the Fed or interest rates. Rather, they are worried about corporate credit. Most will be aware that corporate credit issuance surged over the last decade, especially in fringe investment grade BBB debt. Now, investors are fearing a “wall of maturities”. In the next three years, one third of all triple B rated US debt will come due, a huge test for the group of highly indebted companies. Companies will then need to refinance in this much-less-friendly environment. The Bank for International Settlements warns that in the next downturn, many BBB rated bonds will be downgraded to junk, which will cause fire sales.

FINSUM: Our big worry here is that many institutional investors have strict mandates to not hold junk bonds, so if a solid number of companies fall from the BBB level, there will indeed be huge fire sales in credit markets.

(New York)

High yield had a very bleak run to finish 2018. The asset class went over 40 days without a single sale as the junk credit market seized up. However, it has made a comeback in a major way. The first five weeks of 2019 saw a staggering 5.25% gain in the Bloomberg Barclays US Corporate High Yield Index. New issues were quite oversubscribed (more than double), and the general mood has completely shifted.

FINSUM: The Fed backing off on rates sure makes a difference! It is interesting the market reacted this sharply given that high yield is relatively more insulated from rates. In our view, the turnaround is largely a relief rally that the Fed won’t push the economy into a recession.

(New York)

There are currently a lot of fears about corporate credit’s ability to sink the economy and markets. There has been an absolute massive surge in issuance since the Financial Crisis, and a great deal of that issuance happened in credits just on the bottom fringe of investment grade. And while a good amount of that debt may founder and sink into junk, it won’t be enough to hurt the economy much. The reason? It is because US households have not increased their leverage significantly in recent years, which is likely to prove a saving grace for the economy. Growth in household debt has been lower than inflation, a sign of relative health.

FINSUM: While corporate credit can get markets in trouble, so long as the American consumer is not deleveraging, things will probably not get too bad in the wider economy.

(New York)

The junk bond market may be coming back from the dead. The “December doughnut”, as it is being called, is now in the past, and the frozen market finally thawed this week with the first new junk bond sale since November. The market had gone 41 days without a sale until Tuesday, when $4 bn of new issuance went through.

FINSUM: A 41-day freeze and then 4 sales in one day totaling over $4bn. Demand was so high the companies were able to raise more than expected. Maybe the worst is behind the high yield market?

(New York)

The junk bond market is going through an eye-opening drought. Not one company under investment grade has issued a bond since November, the longest spell of this kind in more than two decades. Investors are worried over the economy and market volatility, which has basically shut down any new issuance. It has now been 41 days since a junk bond sale, the longest period since 1995. December was the first month since 2008 without a junk bond sale.

FINSUM: When credit starts to get ugly, investors would be wise to pay attention. The question is whether this is just a short-term hiatus or a sign of worse things to come.