Feb 8 (IFR) - The recent rise in Treasury yields has led to
a surge of interest in shorter-dated debt in the high-yield
market, as investors look to protect themselves from duration
In the past couple of weeks, a variety of issuers have
responded by pricing five- or six-year bonds with call dates of
around two years or three years, at which point the company is
allowed to redeem the bonds at a specified call price.
These shorter-maturity notes compare with the more typical
high-yield maturities of eight-year non-call four, or 10-year
"Issuers are playing to the appetite of the market, and that
is not for longer-dated fixed income securities at these
extremely low yields," said Dan Heckman, senior fixed income
strategist at US Bank Wealth Management.
The average yield-to-worst hit 5.61%, its lowest point ever,
on January 24, but has since widened to 6.01% as the market has
reacted to rising Treasury yields.
Buy-side participants have been refocusing their strategy in
both the secondary and primary markets to adapt to the changing
"Investors need to be careful and dance around the higher
risk areas of the market from a credit and duration
perspective," said Heckman.
"It doesn't take much of an uptick in default rates for
high-yield to be affected. It's a very touchy time in the bond
market. We would be shortening duration here and taking a little
bit of a breather until we see a better buying opportunity."
SHORT AND GETTING SHORTER
The shorter tenor made up almost half the deal flow last
week. Of the 38 tranches priced across the globe, 17 had
five-year to 6.5-year maturities.
That included US dollar deals for NCL Corporation, Talos
Production, Permian Holdings, Nord Anglia Education, Global A&T
Electronics and Beazer Homes.
This week, Canadian waste management company Tervita Corp
priced a Canadian/US dollar split currency offering that will
mature in 5.75-years, callable in 2.75 years.
Cantor Commercial Real Estate priced a US$250m five-year
non-call two senior unsecured offering. Alliance Grain Traders
came with a five-year C$125m private placement offering, priced
yesterday, with the call structure revised to three years
instead of two.
No surprise either, that short-duration bond funds are also
growing in popularity. These funds have an average maturity of
around two to 2.5 years.
Ultra-short bond funds, with average maturities of less than
a year, are also available. These typically offer higher yields
than money market instruments with less price volatility than a
typical short-term fund.
David Sherman, founder of Cohanzick Management, manages the
RiverPark Short Term High Yield fund, which has an average
maturity of less than six months. The fund targets investors
seeking a very limited interest-rate risk. It has generated a 4%
annual return since its inception in September 2010.
Sherman expects that if interest rates go up gradually, high
yield will perform better than other areas of fixed income.
"Even though junk-bond yields are at historic lows, the
spread over central bank manipulated Treasuries is reasonable
and should provide some cushion in a rising rate environment."
Still, investing in this area it is not entirely without
"If you don't manage it appropriately, there is a lot of
risk being involved in a short-duration fund," said a
short-duration fund manager. "You can't just say short duration
is a flight to safety. The flight to safety is picking the right
Of particular concern is the risk of a default scenario.
Assuming an appropriate yield curve, a shorter-term bond would
typically trade at a much higher dollar price compared to a
longer-term bond in the same complex. In a recovery, this means
that there is far more downside for the short-term paper.
"If you pick the wrong bonds, you are going to get
destroyed," said the fund manager.
With the Fed keeping rates so low, the yield curve for
high-yield is a lot steeper than usual and so high-quality,
short-duration high-yield paper comes with a lower yield.
"It may not be as attractive as it used to be from a yield
standpoint but you have considerably less Treasury risk, which
is compelling for investors in this environment," said Michael
Anderson, chief high-yield bond strategist at Citigroup.
One banker said he has seen a spike in interest for new
five-year issues among short-term investors because of the
current tight secondary spreads.
"Some of this short-term debt, which includes yield-to-call
paper, is hard to find or get at a reasonable price, so
short-term managers are finding value in the primary market.
"With these shorter maturity new issues, we're seeing a
whole different buyer base," he said.
While five-year paper has spiked in recent week, the average
maturity of the high-yield market has shown a steady decline
since the credit crisis as the overall appetite for risk faded.
Sherman of Cohanzick said this suggests that the performance
of short-term high-yield funds should be more correlated with
the overall high-yield market than in the past.
According to the BofA Merrill US high-yield index, the
average maturity in the high-yield market has dropped from a
decade high of 8.5 years in late 2005 to the current average of
6.5 years. When adjusted for bonds trading to the yield-to-worst
call date, the average maturity drops to 5.25 years.
Ultimately, though, bankers don't expect the five-year
non-call two deal to become standard.
"In markets that are constructive and good, issuers always
want to go longer," said the high-yield banker. "If the Treasury
environment got worse, you might see more of these short-term
deals, but if things calm down, the credit environment is fairly
strong and issuers will keep on going with the eight-year and
For other related fixed-income quotations, stories and
guides to Reuters pages, please double click on the symbol:
U.S. corporate bond price quotations...
U.S. credit default swap column........
U.S. credit default swap news..........
European corporate bond market report..
European corporate bond market report..
Credit default swap guide..............
Fixed income guide......
U.S. swap spreads report...............
U.S. Treasury market report............
U.S. Treasury outlook...
U.S. municipal bond market report......