High yield issuance spikes, though led by one jumbo deal, but market remains open
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Weekly issuance volumes are good gauges of market sentiment in an asset class. After Bernanke offered some clarity on the potential timeline of quantitative easing, the high yield market lost 75% of its weekly volume, clearly showing that both issuers and investors were off the market.
The reason why volumes dropped so much was two-fold. On one side, investors didn’t want to hold—much less buy—long-maturity fixed-rate instruments. So on the other side, issuers saw the weakness in the market and preferred to postpone or cancel their planned issuances.
Weekly volume dominated by one issue
The week ended June 29, 2013, totalled just over $6 billion in weekly volume, spread across nine deals. While this amount is a huge recovery from the average $2.5 billion we’ve seen over the previous four weeks, it included a two-part offering by Valeant Pharmaceutical that totaled 3.2 billion, so the adjusted increase is really just over 10%. Nonetheless, the fact that such a jumbo deal was able to place shows that the market remains open for the right issuers and terms.
The Valeant deal was originally composed of two $3.2 billion bonds, one of which had a ten-year maturity and the other an eight-year maturity. The deal had been delayed a few weeks, awaiting better conditions, and the ten-year bond ended up being replaced by a five-year bond, given investor pushback on long-dated paper.
Market recovers slightly
The high yield secondary market recovered some of the losses and closed approximately 1% higher than the previous week. However, market fundamentals remain against any significant appreciation in bond prices. It’s even unlikely that bonds will reach the levels of early May, before speculation about the Fed’s position started to put downward pressure on the market.