Paradoxical reactions: as prices tumble, yields on corporate high-yield bonds rocket to 7.02%

Data Insight DebtDynamics 6 May

Paradoxical reactions: as prices tumble, yields on corporate high-yield bonds rocket to 7.02%

Average prices for high-yield (HY) bonds trading in the secondary market have taken a significant hit this year, falling to only 92.16 on 5 May from a high of 103.17 in January, according to the ICE BofA US High Yield Index. The almost 11-point decline is the largest such slide in prices since May 2020, when bonds were still recovering from the shock of the coronavirus (COVID-19) pandemic. Just last month, issuers including Diebond Nixdorf, Talen Energy and Bed Bath & Beyond saw bond prices plunge more than 20% to 65.56, 40.59 and 55.25, respectively.

Yields have in turn spiked to a high of 7.02% on Thursday (5 May), the highest level seen since June 2020. As recently as September, bond yields sat at historically low levels of only 3.94%, before fears of persistent inflation and resultant rate hikes beset the market. Community Health Systems, for example, saw pricing on its 6.875% paper maturing 2028 slump 14% to 78.46 for an implicit yield of 12.07%.

Flight to safety: high-yield investors pull USD 27bn out of asset class since January

Following the Federal Reserve’s first half-point increase since 2000 on Wednesday (4 May), key rates are expected to hit 2.5-3% by year-end, with many HY investors choosing to park cash in safer assets. Consumer inflation reached 8.5% in March, prompting the central bank’s firm action. With additional 50 basis points (bps) rate hikes likely on the cards, fixed-rate debt instruments such as HY bonds have seen a mass exodus of capital. Since January, USD 27bn has been pulled out of the asset class, according to Lipper funds data.

For others, though, this could be a prime buying opportunity, with a net inflow of USD 1.54bn seen during the weeks of 30 March and 6 April, and bonds trading at a substantial discount to leveraged loans, which have seen average bids hovering around 96.5.

Primary impact: issuance in primary market plunges to lowest level in years

Meanwhile, secondary market conditions and the impact of high inflation and rising rates have been less supportive of primary activity, with HY bond issuance stalling in April. At only USD 13.7bn across 15 deals, second-quarter issuance got off on a poor footing, with the war in Ukraine escalating and the Fed signaling an end to its prolonged ‘easy money’ policy.

Carvana priced the most sizable bond of the month, with a USD 3.275bn unsecured note maturing in 2030. The acquisition financing, supporting the company’s purchase of ADESA’s US physical auction business, was also notable for its 10.25% coupon offered to investors to offset fears of a correction in the used car market. Only last August, Cavana priced an eight-year unsecured tranche at 4.875% and par – today, these notes trade at a midpoint of 73.06 for an implied yield of 10.18%, according to MarketAxess.

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