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It’s alive! High yield volumes come back to life as investors storm the field

Many issuers had been waiting for a clearing before proceeding with postponed bonds—and last week was their chance

Fund flows are a health metric for an asset class. Sharp reversals tend to signal changes in investor preferences, and depending on the context, they may be one-time events or the start of a new trend.

US High Yield Bond Fund Flows 2013-07-23Enlarge Graph

The high yield market (JNK) closed last week with a net inflow of $2.7 billion—quite an upgrade from the $12 million (yes, million) the prior week. This was the highest inflow since the third week of May, when Bernanke spooked the markets. This was the largest inflow since October 2011.

Aggressive deals

The strong investor appetite allowed several aggressive deals to price, including HoldCo PIK (payment-in-kind) Toggle $1 billion notes by Schaeffler, a frequent issuer from the auto parts segment. (Payment-in-kind notes, which are considered aggressive given that they have the option to pay cash interest or pay “in kind,” meaning that the interest adds to the face value of the bond and is paid at maturity. The fact that the notes are at the holding company level effectively gives them less priority than the debt at the subsidiary, increasing their credit risk.) PIK notes usually signal that the market has become over-bullish and that the top is near or passed.

Short-lived

The party may be short-lived for high yield (HYG) investors, though. To read why, continue to Bernanke breathes life into fixed income, but will the market shut down?

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