Jan 4 (IFR) - The yield-to-worst in the high-yield market
dipped to its lowest level ever this week, as risk markets
rallied on the fiscal cliff agreement.
Dropping below 6% for the first time in history, the yield
to worst on the Barclays high-yield index fell to 5.96% on
Wednesday and pushed even lower to 5.90% on Thursday.
This compares to 6.13% on Monday and 8.14% at the start of
The backup in US Treasury yields mid-week caused the average
option-adjusted spread to tighten to 493bp on Wednesday and
484bp on Thursday, from 511bp on Monday. A year ago, it was
quoted at 682bp.
This low-yield environment allowed the first US high-yield
issuer of the year to price its deal at a super-low rate. Crown
Americas captured a 4.5% yield on its new upsized
US$800m 10-year bullet issue, pricing the deal at par Thursday
through Deutsche Bank, BNP Paribas, BofA Merrill, Citi and Wells
According to IFR data, it was the second-lowest yield ever
priced for 10-year paper. Crown's deal ties with PVH Corp's
US$700m 4.50% notes due 2022 that priced just last month. In the
10-year maturity bucket, only DR Horton's US$350m deal, which
priced last September, has a lower yield at 4.375%.
Overall, demand for high-yield paper is expected to remain
strong, with periods of volatility anticipated in 2013.
"While a deal to avoid the fiscal cliff is clearly a
positive in terms of removing some market uncertainty, we still
have a long road of political posturing ahead in 2013," said
Jeff Peskind, chief investment officer at Phoenix Investment
Advisor, which has about US$550m under management.
"This has the potential to cause some market volatility, but
high-yield new issue markets will remain robust."
Indeed, underwriters are hard at work prepping deals for
what is expected to be an extremely busy January. On Monday the
market will shift back into the high gear seen the first couple
of weeks in December, syndicate officials say.
Last month was the busiest December on record, with
US$30.060bn from 66 deals.
Looking ahead, Peskind said he expects the outperformers in
2013 to come from out-of-favor credits that are lower rated.
"The CCC bucket is by definition a risky portion of the high
yield market, but we continue to see the most attractive
valuations in this rating class," said Peskind.
"However, bottom-up fundamental research is key to investing
in the correct credits in the space."
Refinancing is expected to remain the major trend, as low
rates continue to incentivize issuers to term out near and even
Meanwhile continued uncertainty around the ongoing budget
and deficit talks may adversely impact M&A deal flow in the
early part of the year, Peskind said, with a modest pick-up
likely later in 2013.
Some say such low yields are not expected to last through
"We do think yields will get back above 6% area and move
higher in 2013, mainly again as a function of Treasury rates
moving back up and spread widening," said Dan Heckman, senior
fixed income strategist at US Bank Wealth Management.
Following Thursday's FOMC minutes, Heckman expects the yield
on the 10-year Treasury to stay in a range of 1.65%-2.00% for
the first quarter, breaking through 2% as the year evolves and
potentially ending as high as 2.65%.
The 10-year Treasury backed up to 1.90% on Thursday after
the release of the minutes, in which several members said it
would be appropriate to slow or to stop US Treasury bond
purchases well before the end of 2013, which would lead to a
rise in rates much earlier than many are expecting. The 10-year
ended 2012 at 1.76%.
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