High yield issuance closes May with a nose-dive!

High yield issuance closes May with a nose-dive!

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After three relatively strong weeks, issuance fell to the lowest weekly value of the year.

Issuance is important as a gauge of the market for two reasons: corporations prefer issuing when they feel the market is strong and new issues trigger a relative repricing of existing bonds in the market.

Only eight deals printed last week, totaling a mere $2.5 billion. Half of the deals were anemic deals below of $250 million or less. The low issuance last week shows that many issuers did not feel confident the market was strong enough. This was backed by the extreme outflow of funds last week (see High yield issuance volume slows down after week of outflows).

In previous weeks, most deals had priced at the tight1 end of the original price talk, meaning that investors paid the highest price from the original price proposed by the company.

Additionally, several of the deals priced at the wide end of the original price talk, implying that there may have been investor push back, or just a low investor subscription resulting in reduced price competition.

The uncertainty around the Federal Reserve’s timing on phasing out the bond purchasing program has made investors uneasy about staying too long in the high yield market. This has resulted in continued strong inflows into leveraged loans [see Leveraged loan fund flows smaller but resilient], which has remained much more resilient.

In the short-term, the future of high yield bonds is uncertain with a negative bias towards the medium-term.

  1. Referred to as tight because the issuer focuses on yield, hence a higher price means lower or tighter yield

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