What is driving the high yield bonds’ weekly supply market?



Weekly issuance

In this series, we’ll analyze the funds flow and issuances for the high yield bonds and leveraged loans. We’ll also discuss how markets have perceived the interest rate change and touch upon relevant ETFs such as iShares iBoxx $ High Yield Corporate Bond (HYG), SPDR Barclays High Yield Bond (JNK), Power Shares Exchange-Traded Fund Trust II (BKLN), and Pyxis/iBoxx Senior Loan (SNLN).

As clearly depicted in the chart above, the high yield bond issuance for last week was relatively modest with $7.5 billion bonds printed by 14 issuers. The year-to-date volume stood at $82.0 billion, down 17% versus $98.9 billion over the same year-ago period.

A large number of issuers took advantage of decline in the five-year and seven-year Treasury yields, which were down by 3 basis points and 1 basis point to 1.71% and 2.30%, respectively. The ten-year Treasury yield was slightly up by 1 basis point to 2.74%.

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High yield bonds are BB+ or lower rated bonds which are typically priced as Treasury yields, plus the credit spread to compensate for credit risk. Other things being equal, an increase in the Treasury yields is generally associated with the expansion in economic activity, which improves credit fundamentals, but also leads to decline in the bond prices due to inverse relationship between interest rates and bond prices. However, when economy declines, the central bank cuts the interest rates to mobilize the economic activity, which leads to increase in the bond prices.

Expansion in credit spread

Last week, the credit spreads in high yield bond market increased by five basis point under the market perception of higher risk. The increase was also a reflection of 44% of low rated bonds being issued, mostly single B rated. Other things being constant, lower the credit rating, the higher would be the credit spread, as investors demand high premium to take on additional risk. The opposite holds true for the higher credit rating, which translates into less risk premium.

New-issue yields: BB rated versus Single B

Higher credit spreads also drove the yields for new issuance, which was slightly up from the previous week. Newly issued single B rated high yield bonds were in high demand at an average yield of 6.26%, up from 6.22% yields in the previous week. Plus, the average yield for newly issued BB rated bonds increased to 5.30% from 5.19% the previous week.

Among last week’s major issuances, the SEC-registered Crown Castle International (CCI), a telecom company, with a credit rating of BB/B1 accessed the high yield bond market to raise $850 million eight-year senior notes issued at discount to yield 4.95%, which was at the tight end of the talk. The company intends to use the net proceeds of the offering to repay all outstanding borrowing.

To know more on the structure of the deals for last week, read Part 2 of the series.


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