High yield issuance still down, is the market gone for the summer?

US High Yield Bond Market Issuance 2013-06-12Enlarge GraphThe volume of issuance remained at the same depressed level as the prior week.

Weekly issuance volumes can be a gauge of both issuer bond supply and investor appetite since issuers come to market when they sense strong investor appetite. The past few weeks have been weak, but the last two in particular have been particularly anemic.

Advising banks to the issuers usually perform market soundings prior to issuance to gauge the overall appetite in the market to decide on the best timing to issue new bonds. It seems the past two weeks were not the right time. Issuance last week totaled $2.3 billion, just slightly lower than the $2.5bn the week prior, which was a 75% drop from the volume two weeks ago.

On the other hand, the forward pipeline is now close to twice the weekly average and over 3.5x the size than that for the past three weeks, so a pent-up supply is building up. The question now is whether the deals will be pulled or if the market will improve to allow issuance. Either way, it is an uphill battle and one that goes against investors in high yield ETFs.

Outlook
It is likely that several issuers will come to the market over the next 2-4 weeks to try their luck in the market before definitely missing the low rates bus. Anecdotal evidence reveals that there is still cash sitting on the sidelines and it needs to be invested, hence fund managers may have no choice but to buy the bonds, though the yields are likely increasing slightly versus recent weeks.

The huge cash outflow last week is certainly a signal that many investors have moved out of high yield and will likely stay out given the lack of a positive catalyst to return and increasing downside due to interest rate risk.

There is too much downside in the short term and no medium catalyst as to get invested in the asset class right now.