Primary capital markets’ importance for bond pricing
Corporate borrowers issue debt in the primary capital markets. It’s important to observe prices and yields in recent primary market transactions. Unlike large-cap stocks—like those in the SPDR Dow Jones Industrial Average ETF (DIA)—secondary market trading in high-yield corporate bonds (HYG) (JNK) can be thin.
Primary market price and yields data will help you compare returns and risks across sectors and issuers. You can also assess risks and returns across bonds of varying qualities by observing credit spreads. You’ll read more about credit spreads in Part 5 of this series.
Primary market activity in high-yield bonds in the week ending September 19
Despite the relatively healthy new supply last week, issuance was down compared to the previous two weeks. Issuance was partly affected by adverse conditions for high-yield bond mutual funds. Investor flows continued to trend outwards (refer to Part 5). This affected the demand for new issues. Potential buyers needed liquidity to fund withdrawals.
Purpose of issuance
Nine out of the 17 issues were earmarked for funding acquisitions or leveraged buyouts (or LBOs). Other debt issues involved refinancing—four, dividend payments or recapitalization—two, and general corporate purposes—three. The trend for acquisition-related funding is expected to continue throughout 2014. We discussed this in an earlier series. You can read about it in the Market Realist series, “High-yield debt funds see record outflows and bonds rally.”
Issuance by sector
Industrials sector borrowers accounted for the most issues—six. They were followed by media firms—three. Major issuers included AECOM Technology (or ACM) and American Airlines (AAL). AAL is part of the iShares Russell 1000 Growth ETF (IWF).