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Must know: Why did the high yield bond market weaken?

Chanderlekha Nayar

Must know: The weekly high yield bonds and leveraged loans update (Part 2 of 8)

(Continued from Part 1)

Week shortened due to holiday

Activity in high yield bond market (HYG) remained apathetic last week; first, because the market remained closed on Monday, February 17, 2018, on account of the Presidents’ Day holiday; second, because many investors favored the leverage loan market despite the decline in the U.S. ten-year Treasury yields as weakening economic indicators forced investors to flee for safety than for higher yields. High yield bonds normally offer higher yields than leverage loans but at the same carry higher credit risk (to learn more on this, read our series on credit risk). Issuance declined sharply by over 60% to $1.9 billion from $5.2 billion from the previous week. This was the second straight weekly decline since the beginning of the month and lowest since the start of the year.

The year-to-date issuance was $39.3billion, 24% lower than the $51.6 billion issuance over the same period in 2013. Prices for both SPDR (JNK) and iShares (HYG) high yield bonds ETFs, which represent ~95% of the total high yield ETFs, were mostly flat throughout the week and settled on a slightly higher note on Friday.

The U.S. ten-year Treasury yield and the Bank of America Merrill Lynch US High Yield Master II Index effective yield were down by 1bp and 13bps, respectively. Credit spreads continued to compress by 13bps last week, similar to the week ended February 14, 2014. Although the compressed spreads were perceived as improvement in the economy, last week’s compression was mainly due to the higher drop in the high yield bond market than in the U.S. ten-year Treasury.

Deal flows on the board were at monthly lows with just four issuers hitting the ground at an average ticket size of $470 million, slightly above the previous week’s ticket size of $430 million.

Continue to Part 3

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