Rising Treasury yields begin to pressure US high-yield market

Thu Jan 31, 2013 2:51pm EST

NEW YORK, Jan 31 (IFR) - The recent back-up in Treasury yields is taking its toll on the lower-coupon, longer-duration end of the US high-yield market.

The yield on the 10-year Treasury has climbed 35 basis points since the end of 2012 and is now putting pressure on news issues of high-yield bonds.

The average yield-to-worst on the Barclays high-yield index had widened 16bp to 5.77% as of Wednesday from its all-time low of 5.61% recorded last Thursday. Meanwhile, bankers are reporting outflows from high-yield funds this week.

"The market is getting very nervous about long duration bonds in the face of a rapidly rising Treasury environment," said one syndicate official.

Those jitters have led some recent new issues to price wider than originally expected and forced issuers and underwriters to restructure tranche sizes or duration.

Wednesday's deals from Lennar Corp and D.R. Horton went through some hoops, although they still priced at or near record low coupons.

A lack of appetite for longer-dated paper led DR Horton to restructure its US$700m seven-year and 12-year two-part offering into shorter five-year and 10-year notes.

Leads then shifted US$100m from the longer 10-year tranche to the shorter five-year tranche, based on demand. And finally, the US$300m 10-year tranche priced at the wide end of its 4.50%-4.75% price talk as 4.75% at 100 (which was even wider than the original whisper talk of 4.25% area).

The US$400m five-year priced at 3.625% at par. JP Morgan, Citi, Deutsche Bank, RBS, UBS and Wells Fargo were joint books.

Lennar's two-part offering was decreased from US$500m to US$450m, with the deal split between US$275m six-year senior notes (decreased from US$350m) and an increased US$175m (from US$150m) add-on to its 4.75% senior notes due 2022.

The 2019 tranche priced at 4.125% at 99.998 to yield 4.125%. The add-on was priced at 98.073 to yield 5%.

Citi, BofA Merrill, BMO, Deutsche Bank, JP Morgan and UBS were joint books on the deal.

Both sets of notes went on to perform sluggishly in the aftermarket, rising an eighth to a quarter of a point. Today, D.R. Horton's 10-years are trading flat at 100, while the five-year notes are trading at 100.50.

Market participants say the shift in tone is a good thing for the high-yield market, which for many weeks has continued to see new issues price at record low yields.

"I think a little re-pricing isn't bad. These blips are good for the market," said one banker. "That said, you could get bad economic data and see the 10-year right back down."

Indeed, there have been several false starts on rising rates since the credit crisis, with negative macroeconomic news emerging to nip the rally in the bud. On Thursday, Treasury yields fell slightly on disappointing data out of Europe and higher-than-expected US jobless claims. Market participants are now focused on tomorrow's payroll report.

Issuance is still up significantly year over year for the month of January. Among US issuers, roughly US$32bn has priced, while the global count is expected to total around US$50.5bn.

Globally, this is twice as much as last January when US$24.4bn priced. The US total was US$22.8bn last year.

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