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Why high yield bond issuance reveals a horizontal market

Chanderlekha Nayar

Why high yield bond issuance reveals a horizontal market (Part 1 of 4)

Horizontal market

In this series, we’ll detail the impact of economic indicators discussed in our previous series that pushed down U.S. Treasury rates across maturities, ranging from mid-term (three to five years) to long-term maturities (seven years to thirty years).

High yield bond (HYG) issuance was mostly flat last week, at $1.9 billion, compared to similar issuance the previous week. The four-week average issuance slipped $64 million, to $3.8 billion, from the three-week average issuance of $4.4 billion.

Year-to-date issuance was $39.8 billion—31% down from the year-to-date issuance of $57.6 billion in 2013. Of the total year-to-date issuance, 42% of the bonds were single B rated, while 30% were BB rated. Only 12% of bonds were BBB/BB rated. Single B rated bonds are riskier than BBB/BB rated bonds. However, they offer higher yields to compensate for the risk.

Trends in high yield bond issuance have been moribund since the beginning of the year, with a peak in mid-January 2013, at $9.2 billion issuance. Issuers in the high yield bond market are very receptive to changes in U.S. Treasury rates. Increases in Treasury rates tend to compress the junk-Treasury spread, which drags investor demand for high yield bonds as investors’ premiums for holding riskier assets over U.S. Treasuries depress.

Both the U.S. ten-year Treasury yield and the Bank of America Merrill Lynch U.S. High Yield Master II Index effective yield were down, by 8 basis points and 9 basis points, respectively, last week. This led to a compression in credit spreads of over 3 basis points.

In an inverse relation to the decline in the U.S. ten-year Treasury rates, prices for the high yield tradable equivalents such as the iShares iBoxx $ High Yield Corporate Bond (HYG) were up 1%. Prices for the SPDR Barclays Capital High Yield Bond ETF (JNK) were also 1% higher than the previous week.

HYG, with its top holdings in Sprint Corporation (S), First Data Corp (FDC), and H. J. Heinz Company (HNZ), seeks to correspond to the iBoxx $ Liquid High Yield Index. The Sprint Corporation, commonly known as Sprint (S), is a U.S. telecommunications holding company that provides wireless services and is also a major global Internet carrier. First Data Corporation (FDC) provides electronic commerce and payment solutions.

JNK, with top holdings in Hospital Corporation of America (HCA), seeks to correspond to the Barclays Capital High Yield Very Liquid Index. Hospital Corporation of America (HCA) is an American not-for-profit operator of healthcare facilities—the largest such company in the world.

Only a handful of issuers tapped the market last week to take advantage of the decline in U.S. ten-year Treasury yields. Read on to the next part of this series to learn about the structure of the deals issued last week.

Continue to Part 2

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