October High Yield Issuance Declines After Torrid September
The place where the real big boys play, high yield cash bonds and CDS in IG, has seen unprecedented activity over the past year. Overall, more than $1 trillion in corporate issues were sold in 2009, although in fairness $192 billion of this amount is courtesy of taxpayer subsidized TLGP sponsored financial issuance (Mr. Blankfein, speaking of transparency, when do you plan on paying back your portion of TLGP debt?). Yet real speculative mania has never been as evident as what has transpired in the junk bond domain: YTD more than $103 billion of BB- and below rater paper has been issued, compared to just $48.8 billion for all of 2008.
Thomson Reuters reports:
September volume was $17.9 billion, second this year only to May, versus $8.2 billion a year ago. For 3Q09, volume was $40.3 billion versus only $13.7 billion in 3Q08. For the latest week, volume was $3.2 billion, once again spread over eight deals, versus $2.7 billion the week prior. Half of the week's issuance came on Friday, with three quick-print deals (Solutia, Nova Chemicals and Wynn Las Vegas) hitting the market for $1.6 billion. Overall volume slowed somewhat from September's torrid pace.
The bond market was closed yesterday in observance of Columbus Day. Despite the holiday, high yield issuance could well pick up this week as six deals are expected to be announced today, and probably more later in the week. The new issue pipeline, at $6.5 billion, is still substantial, and investors continue to shift out of cash into higher-yielding assets. A $600 million deal by digital cinema services company Deluxe Entertainment was expected to price last week. It is now expected for this week after the company reportedly made covenant changes.
Year-to-date high yield volume stands at $103 billion, more than double the $48.8 billion figure for all of 2008. Year-to-date total returns for the Merrill Lynch High Yield Master II index edged higher to +48.9%. By comparison, the S&P 500 is up only +18.6% for the year.
Flows into high yield mutual funds rebounded briskly during the week ended Oct. 7, to +$484 million versus +$122.6 million the previous week, according to AMG Data Services. It was the seventh straight week of inflows. The four-week moving average of net inflows, after drifting sideways during most of September, rose to +$338 million from +$272 million. Year-to-date net inflows for weekly reporting funds now stand at $17.5 billion.
The question is how much of the HFT-driven stock market euphoria is spilling over into bonds and creating a vicious perception cycle that thing are improving based on a low-volume market driving enthusiasm for the much broader credit market. Or, is it a simpler explanation that as fund flows have refused to chase equities and instead focus on credit markets, the proverbial excess capital is looking for somewhat stabler returns. Either way, as the HY and LCDX index continue hitting 52 week tight levels, the upside at this point is strictly limited. The question then become whether the excess capital will spill over away from credit and into its natural follow-thru: equities. So far it has not happened, which does present an interesting observation: have investors split into two polar opposite group: equity (retail, quants, and dinosaur money) and credit (everyone else)? It would explain the observation that both equities and bonds are screaming to record highs at the same time, although such a dichotomy makes no sense: at some point one or the other will be proven wrong. We can't wait to find out who.