High-Yield Bond Market Shows Signs of Life Amid Low US Treasury Yields

Strategic Insights -

The high-yield bond market appears to be regaining momentum after a sharp sell-off in March, driven by a surge in demand for higher-yielding debt. Qwest Communications' jumbo $1.75 billion bond issue in the US, the largest since March, and news of the first European high-yield bonds in over a month suggest that investors are seeking yield in a low-interest rate environment.

The European high-yield market has been stagnant, with issuance hitting a 19-month low in May. However, the aggregate spread for European high-yield bonds has stabilized, and borrowers are now confident enough to tap the market. The much-larger US market has seen a surge in issue volumes in the past week, with many issuers still hesitant to come to the market, awaiting further declines in Treasury bond yields.

Key Takeaways:

  • Qwest Communications issued a $1.75 billion three-tranche bond deal, the largest US high-yield offering since March.
  • The European high-yield market is showing signs of coming to life after a 19-month low in issuance in May.
  • The aggregate spread for European high-yield bonds has nearly doubled from 261 basis points in March to 515 basis points in mid-May, but has since stabilized.
  • Issuance volumes in the US market have surged in the past week, with many issuers still hesitant to come to the market.
  • Investors are taking a more measured approach, with Pioneer Investments' Margaret Patel stating that high-yield bond returns will be primarily limited to coupon income this year.
  • The spread on Ford's three-year note has widened from 300bp over Treasuries to 337bp, and Qwest's outstanding 2010 notes have widened to 535bp from 487bp early this week.
  • Investment banks have a string of deals waiting, and F&C's Strategic Bond Fund is increasing its risk posture.

Statistics:

  • $1.75 billion: The size of Qwest Communications' three-tranche bond deal, the largest US high-yield offering since March.
  • 261 basis points: The aggregate spread for European high-yield bonds in March.
  • 515 basis points: The aggregate spread for European high-yield bonds in mid-May.
  • 19 months: The low point in European high-yield market issuance in May.
  • 300bp to 337bp: The widening of Ford's three-year note spread over Treasuries.
  • 487bp to 535bp: The widening of Qwest's outstanding 2010 notes spread over Treasuries.

Sources:

  • "Buyers have got tons of money to invest," said one debt syndicate manager in New York.
  • Margaret Patel, US high-yield bond portfolio manager at Pioneer Investments.
  • Roman Gaiser, portfolio manager at F&C's Strategic Bond Fund in London.
  • Kingman Penniman, of independent US consultancy KDP Advisors.