Corporate debt reacts to FOMC minutes and Europe’s banking stress
Corporate debt markets in the week ending July 11
In a week of reversals, many trends changed course for lower-rate debt investors in the week ending July 11. While weekly issuance volumes for high-yield debt (HYG) securities surged by ~42% week-over-week (or WoW) to $6.78 billion, yields on high-yield debt also increased, leading to negative returns on the asset class over the week.
Issuance for investment-grade corporate bonds was strong, although volumes increased just 3% WoW to $21.1 billion. Due to the advent of the earnings season, many corporates are experiencing black-out periods. As a result, there were no issues priced on Thursday and Friday of last week (Source: S&P Capital IQ/LCD).
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Effect of the FOMC minutes on debt markets
The release of the Fed’s Federal Open Market Committee (or FOMC) minutes for the June meeting, exerted a considerable influence over debt markets (AGG) last week. The minutes warned that measures of uncertainty in financial markets declined which may be a reflection of “complacency” among investors regarding potential risks. We’ll be discussing the impact of the FOMC minutes on high-yield debt markets in greater detail in Part 4 of this series.
High-yield debt is riskier than investment-grade debt. While yields on Treasuries (TLT) and corporate investment-grade debt (LQD) fell last week on the Fed’s continued dovish stance, yields for high-yield debt increased on the Fed’s take on riskier debt securities. We’ll be covering the yields and spreads analysis in greater detail for both high-yield (Part 3) and investment-grade debt (Part 7) in the coming sections.
Yellen’s take on high-yield debt and leveraged loans in her congressional testimony
These risks were reiterated by Fed Chair, Janet Yellen, in her semi-annual congressional testimony on July 15. She warned of signs of increasing risk-taking and lower underwriting standards in the leveraged loan and junk bond markets.
“While prices of real estate, equities, and corporate bonds have risen appreciably and valuation metrics have increased, they remain generally in line with historical norms. In some sectors, such as lower-rated corporate debt, valuations appear stretched and issuance has been brisk. Accordingly, we’re closely monitoring developments in the leveraged loan market and are working to enhance the effectiveness of our supervisory guidance,” said Yellen.
Flows in loan mutual funds
Ironically, the warning comes just as net flows into leveraged loan mutual funds reversed nine consecutive weeks of outflows. Investor flows into these funds showed a small net inflow of $49 million last week. High-yield debt (JNK) mutual funds also recorded a net inflow of $107 million in the week (Source: Lipper).
In the next section, we’ll discuss the major deals in the high-yield debt market in the week ending July 11.