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
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
But some see conditions in the high-yield space as similar
to the boom before the financial crisis, and that should make
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
"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
It was the fourth consecutive week of inflows into
FAVOURING THE BOLD
Not surprisingly, issuers are getting more aggressive in the
Scaffolding company Safway Group on Tuesday priced an
upsized US$560m senior secured second lien offering to fund a
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
"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
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'
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
"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;
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