The debt rally has allowed many issuers to refinance their debt, but most of it has been refinanced already.
The quarterly data by BAML showed that at the end of Q1 there were only $12 billion of bonds left in the market maturing in 2013, followed by $24 billion in 2014 and $49 billion in 2015. This implies that there are only $85 billion worth of bonds that need to be somewhat urgently refinanced.
While there have been refinancings of 2017 and 2018, these are not as crucial and will partially be offset by the near-term bonds that will be allowed to mature.
Over the past 3 weeks since the the data posted, there has been $20 billion in high yield issuance in the market, of which approximately 70% have been refinancings. At this rate, approximately $20 billion will be refinanced each month, and to be conservative, let’s assume $15 billion each month over the next three years.
This implies that six months from now there will be virtually no urgent bond refinances needed, hence investors would have to seek bonds in the secondary market instead. The increased demand for existing bonds may sustain the prices and at least partially offset any potential interest rate hike.
On the other hand, once interest rates start creeping up, investors will start rotating out of bonds and into equities, or at least into floating rate debt, such as leveraged loans.
Nonetheless, the data could imply that bond prices may be able to hold in the short-term despite the fears of an early phase out of quantitative easing. The decrease in supply of new bonds could offset the investor decrease in demand, and in the case that the economy worsens, then prices would remain even more resilient.
The high yield bond ETFs started the week strong and have rallied 1.2% in just two days on the back of disappointing Q1 earnings. At least until the earnings season is over and investors keep getting disappointed, HYG and JNK may be good places to be.
© 2013 Market Realist, Inc.
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