Grinding tighter, the high-yield market shrugs off mixed earnings, softer economic data and fears of a possible recession. To revisit my last Chart of the Week and complement Greg Zappin’s recent post, the market was tested over the course of the last few weeks. Fresh economic data and a busy primary market last week demonstrated the resilience in risk markets this year. It was only two weeks ago that the Chicago Board Options Exchange Volatility Index (VIX) closed just below 40, but briefly touched 65.1 Weaker-than-expected manufacturing data and July nonfarm payrolls prompted questions regarding the number of rate cuts in 2024. Depending on credit quality, high yield sold off approximately 0.50 points to 3 points, broadly. Softer earnings or outright misses in conjunction with the economic data, led to a few high-yield names selling off several points.
However, the market has recouped nearly all of its losses since August 5. It’s also worth noting that the market saw the biggest widening in U.S. high-yield spreads since March 2020.2 A busier primary calendar last week and heavier trading volumes highlighted investors’ strong demand for yield. And, yields for high yield made a 2-year low after breaking through the bottom end of the 2024 range last week, while equities had their best week since November 2023.3
Not far removed from the weak economic data and an expected downward revision to payrolls this week, the high-yield market remains firm. Year-to-date returns for U.S. Corporate CCC-rated bonds have outpaced the broader high-yield market by roughly 115 basis points (bps).4 Those yield buyers are betting on a soft landing and resilient fundamentals, partly evident in the demand for new high-yield issues. During last week’s quick flurry of new deals, many of which were heavily oversubscribed, 11 deals totaled $9.4 billion in issuance.5 Estimates for high-yield issuance this week are roughly $2 billion.6 Issuers saw the relief in rates as an opportunity to access the capital markets prior to last week’s Consumer Price Index (CPI) print on Wednesday and before Federal Reserve Chair Powell’s speech at Jackson Hole this Friday.
Key Takeaway
The robust demand for yield has seemingly outweighed fears of a hard landing and certain isolated credit concerns. With 2024 issuance well above 2023 levels and the strong calendar last week, high-yield spreads continue to remain tight. My initial thoughts of spread widening throughout the year have seemed to be partly disproven. While we’ve seen many B3 and CCC-rated issuers gaining access to the primary market, there has not been much weakness or significant spread widening taking place for the broader high-yield market. Since I last wrote in early May, high-yield spreads are only wider by approximately 15 bps.7 However, certain idiosyncratic events and the prevalence of liability management exercises continue to weigh on certain credits.
Sources:
1,4,7Bloomberg
2Bloomberg – Junk Debt’s Swift Recovery Shows Chase for Yield Alive and Well; 8/13/24
3,5JP Morgan
6Barclays
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This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
Opinions and statements of financial market trends that are based on current market conditions constitute judgment of the author and are subject to change without notice. The information and opinions contained in this material are derived from sources deemed to be reliable but should not be assumed to be accurate or complete. Statements that reflect projections or expectations of future financial or economic performance of the markets may be considered forward-looking statements. Actual results may differ significantly. Any forecasts contained in this material are based on various estimates and assumptions, and there can be no assurance that such estimates or assumptions will prove accurate.
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High-Yield bonds are subject to greater fluctuations in value and risk of loss of income and principal. Investing in higher yielding, lower rated corporate bonds have a greater risk of price fluctuations and loss of principal and income than U.S. Treasury bonds and bills. Government securities offer a higher degree of safety and are guaranteed as to the timely payment of principal and interest if held to maturity.
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