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Bernanke stops high yield market in its tracks; volumes freeze

JNK Price 2013-06-28Enlarge Graph

After Bernanke’s post-FOMC statement, Treasury yields soared over 30bps

The Federal Open Market Committee (FOMC) meeting is the Federal Reserve’s committee in charge of deciding the fate of interest rates and the quantitative easing program. Bonds are particularly sensitive to changes in interest rates due to the fixed rate coupons they pay.

Bernanke’s statement included a clear timeline of when the quantitative easing program would taper, though subject to several thresholds on certain macroeconomic indicators. This was enough to get investors and issuers to freeze for the rest of the week.

A total of seven bonds priced last week, though none priced after Wednesday. The total volume was again dismal, at a mere $2.4 billion. Investors weren’t willing to invest in new issues that could easily drop in value if the Fed made a surprise statement, while at the same time, issuers felt the market was too volatile and that waiting would be better.

The pain may not be over

The 50bps (basis point) movement experienced by Treasuries over the past week sent bond prices screaming down. Both JNK and HYG lost close to 6%, and it’s unlikely that they’ll recover the losses, given the pricing-in of a now-more-certain quantitative easing tapering timeline.

Bernanke’s statement conditioned the tapering on unemployment crossing 6.5%, which may or may not happen. Given the strong market reaction, the sentiment will likely remain bearish (negative) for a few more weeks, which could weigh down the payrolls data if hiring managers share in the pessimism.

Over the next month, the market will likely be on edge and overreact to small pieces of data as the end of the month data releases approach.

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