Why did last week’s high yield bond issuance remain subdued?

Last week’s deals

The week saw higher high yield bond prices. However, high yield bond (HYG) new issuance for the week ended February 14, 2014, plummeted 18% on concerns of the increased U.S. ten-year Treasury yields. The total number of deals in the market remained unchanged over the previous week, revealing that deal size was much smaller than the previous week. Most of the deals last week were in the $200-to-$600 range, except Citigroup (C) and B Communications Ltd. (BCOM), which brought the largest transactions, at $1 billion and $800 million, respectively. Total issuance for the week was $5.2 billion—$1.1 billion down from last week’s $6.3 billion.

Why did last week’s high yield bond issuance remain subdued?

The year-to-date issuance has been $37 billion, 14% lower than the $43 billion issuance over the same period in 2013. Prices for both SPDR (JNK) and iShares (HYG) high yield bond ETFs, which represent ~95% of the total high yield ETFs, were up 100 basis point, as investors continued to favor the high yield bond market.

The Bank of America Merrill Lynch U.S. High Yield Master II Index effective yield was down 10 basis points from the previous week, which ended at 5.88%. The credit spread between the high yield bond index and the U.S. ten-year Treasury declined 13 basis points last week.

The compressed spreads reflect advanced expectations of economic improvement. While the overall bond market has dropped slightly due to expectations of increased interest rates, the high yield market drop has been offset by this spread compression. This may remain the case. However, spreads are already very tight compared to historical averages.

Read on to the next part of this series to see why the number of deals in the high yield bond space continues to favor refinancing.