High yield issuance remains steady
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High yield issuance volume last week remained in line with the five week average. The prices in the bond market are no stranger to the supply and demand market rules. When supply decreases, prices increase; if demand falls, prices will fall. The market is currently seeing both a decrease in supply and a decrease in demand, which is helping to maintain prices relatively steady.
Supply is gauge by the number of new issuances pricing in the market, which needs to surpass the number of bond refinancings and maturities to keep a stable supply of bonds. Demand is gauged by fund flows, which measure how much cash investors move into mutual funds focused on high yield bonds.
The supply last week reached $6.5 billion, right on the five week average but just slightly below the year-to-date average of $6.6 billion. Nonetheless, the markets are somewhat stronger than during February when fears of a rates hike ahead of schedule by the Fed circled the market. The Fed has since restated their intent to maintain rates low for longer.
Furthermore, the market appetite will be tested today when the $3.1 billion Heinz bond prices as part of the financing for Warren Buffet’s Berkshire Hathaway leveraged buyout of Heinz. This is the largest bond for the year and given current price talk of 4.25% and the recent upsize by $1 billion, it seems the market will give it a warm reception.
On the demand side, last week had a negative outflow compared to the large positive inflow the previous week. The demand remains weak compared to the record inflows into the leveraged loan market, but prices have held up given the relatively modest level of supply.
Prices for HYG and JNK have recovered from the drop in late January and their returns are now starting to turn positive year-to-date. Overall, it seems that in the short term high yield bond prices are likely to hold steady, allowing investors to benefit from the interest income in the meantime. In the longer term there is more downward pressure than upward pressure given the risk of interest rate hikes if the economy recovers or credit spreads widening if the economy tanks.