It appears that Tesla Motors (TSLA) will now be adding to the high-yield bonds segment flows with any new debt issuance.
The premium electric car manufacturer competing with the likes of General Motors (GM) and Toyota Motors (TM), received an unsolicited rating from the credit rating firm Standard & Poor’s. The company’s $2.2 billion debt, due over the course of the next 4–7 years, was downgraded to junk (B-) level on May 20.
Investors flock to invest in junk bonds because they offer a higher rate of interest to cover the risk premium. Exchange-traded funds (or ETFs) such as the SPDR Barclays Capital Convertible Bond ETF (CWB), which is the only U.S.-listed ETF devoted exclusively to convertible bonds, has a 1.31% exposure to Tesla Motors’ (TSLA) debt. Given the new junk status of its debt, any new debt issuance by the company will add to the high-yield or junk bonds market flows.
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For the week ending May 23, the high-yield bonds market gained as investor appetite for high-risk, high-return investments remained strong. During the week, the high-yield bonds market saw an issuance of $15.2 billion across 20 deals as compared to $8.6 billion during the previous week ending May 16. The year-to-date issuance reached a total of $151 billion—short of the $161 billion during the same period the previous year.
As a result, the funds flow to the high-yield bonds market for the week ending May 23 had inflows of $744 million, versus inflows of $472 million in the week ending May 16. The aggregate year-to-date funds flow to the high-yield bonds market on May 23 stood at $4.9 billion.
Treasury yields across maturities gained last week. Popular high-yield bond ETFs such as the iShares iBoxx $ High Yield Corporate Bonds (HYG) and the SPDR Barclays High Yield Bond (JNK) gained a little in terms of price despite the rise in yields. As these securities price in the yield received on Treasury, which is considered risk-free plus a premium for the credit risk (the credit spread from risk-free rate), the high-yields gained in sum. The gain was a result of a increase in the risk-free rate or Treasuries which was positively impacted by the improving market conditions and the recent positive economic indicator readings.
The demand for high-yield remained strong, while leveraged loans continued to decrease in demand. To learn more, continue reading the next part of this series.