Why the market may hold up despite a high yield volume drop

Market Realist

The federal shutdown's impact on high yield bonds (Part 2 of 5)

(Continued from Part 1)

Reduced issuance

The risk-off mentality is driving increased market volatility, and volatile markets are never good markets to issue new debt in. In many cases, the investment banks may be underwriting the bond issuances and wouldn’t be willing to issue in a market in which volatility can move the price enough to eat away their fees and perhaps even cause losses.

In the case of best-efforts deals, then the issuer is the one facing the market risk. An issuer is more likely to wait for a clear day if it has the luxury of time, rather than issue in the middle of market turmoil and lock in a terrible yield. This is especially true since many market participants expect the shutdown to be over relatively quickly.

New issuance drops

Last week, issuance was almost null. Only four deals priced a mere $1.4 billion. This contrasted with the 27 deals priced the previous week, which resulted in $16.7 billion hitting the market.

Year-to-date issuance is now at $261 billion. Issuers piled onto the market to issue before the government shutdown deadline given the expected market unrest that would unleash.

Hope ahead

In the high yield market, a strong new issuance volume can drive up the prices in the secondary market. In the absence of strong issuance, the secondary market may not find a strong price support and prices may weaken.

Going into week 2 of the shutdown, the high yield market is now finding price support. Read on to learn why an extended shutdown is beneficial to high yield bonds.

Continue to Part 3

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