May 10 (IFR) - The US junk bond market is back in full swing, with investors embracing riskier assets in the hunt for yield and issuers getting away with historically tight pricing - and increasingly aggressive structures.
And while the high-yield frenzy is sparking occasional bouts of nervousness, money keeps pouring into the asset class as the search for returns trumps worries about a possible bubble.
"What investors seem to be most afraid of at this stage is simply missing out - missing out on carry in the best case, and continued tightening in the worst," Stephen Antczak, managing director and head of the US credit strategy team at Citigroup, said in a report this week.
Antczak said investors did not expect defaults to pick up any time soon, mark-to-market risk is low, and the sensitivity to systemic problems is muted.
"As a result, the fear of missing out may keep investors taking on risk," he said.
Meanwhile the surge in demand is pushing yields down to record lows.
The yield-to-worst on the Barclays US Corporate High Yield Index closed Tuesday at 4.97%, breaking through the 5% barrier for the first time in the index's 30-year history. Just three months ago, the yield-to-worst was 6%; at this time last year, it was 7%.
Barclays said the option-adjusted spread - 405bp as of Wednesday - is still wider than the record tight of 233bp in pre-crisis 2007.
But some see conditions in the high-yield space as similar to the boom before the financial crisis, and that should make investors wary.
Andrew Jessop, executive vice president and high-yield portfolio manager at Pimco, said there was "indiscriminate" buying in the high-yield primary market, and that it was unlikely that most buyers had the resources to look at deals in appropriate depth.
"It's symptomatic of when you have a lot of issuance and a frenzy to try and get the cash flows invested," he said.
For the week ending May 8, high-yield bond funds attracted $789.4m in inflows, according to Lipper, a Thomson Reuters research firm.
It was the fourth consecutive week of inflows into high-yield.
FAVOURING THE BOLD
Not surprisingly, issuers are getting more aggressive in the current climate.
Scaffolding company Safway Group on Tuesday priced an upsized US$560m senior secured second lien offering to fund a shareholder distribution.
Initially floated at talk of 7.25% area, Safway was able to squeeze final pricing to 7.0% despite the larger deal size.
On Wednesday, packaging company Bway Corp hit the market with a US$285m Caa2/CCC+ rated payment-in-kind toggle offering to pay a dividend to its owners. The 4.5-year notes priced at a 9% coupon at 99 to yield 10.035%.
Last month, Sirius XM Radio launched a single tranche US$500m seven-year non-call three senior note offering partly intended for share repurchases. Sirius upsized the deal to include an additional US$500m 10-year non-call five tranche.
Rated B1/BB, the seven-year priced at 4.25% at par while the 10-year priced at 4.625% at par.
Though these deals were seen to benefit equity holders over bondholders, investors still seemed eager to scoop up the paper.
"There's a price for everything," said one high-yield banker.
"There's nothing you can buy in the secondary market right now, it's all bid. Investors would rather buy non-dividend transactions, of course, but for the right credits they will participate. I think we will see a lot more of these."
DOUBT SETS IN
Some in the market are beginning to express doubts about how long the high-yield momentum can continue before an inevitable correction.
Bank of America Merrill Lynch analysts said this week that an investor survey found increasing worry that the rush into high-yield is driving down yields without a corresponding change in credit fundamentals or interest rates - signs of what could be a classic investment bubble.
"There are increasing concerns about inflows leading to bubbles, mainly in high yield," they said. "In fact, asset bubbles now rank as the number one concern on credit investors' minds."
But of course one true sign of a bubble is that the upside goes for longer than many in the market would have expected.
"You can say that things are overvalued and that there are dangers, but the rally continues for years," said William Larkin, fixed income portfolio manager at Cabot Money Management.
"People managing money for a long time are getting very nervous at this point. Spreads are so narrow that we are looking at assets that will trade negatively if interest rates rise," he said.
"High-yield bonds have become as sensitive to rising rates as high-grade bonds, because there is no spread cushion left."
(This story will be published in the May 11 issue of International Financing Review, a Thomson Reuters publication; www.ifre.com)
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