Market Insider

This would signal real improvement in high yield

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For investors, junk bonds may seem hot again, but maybe not so for many companies that want to issue debt.

The high-yield market, crushed earlier this year, has been recovering and spreads are tightening, but the amount of new issuance is still running at just a trickle. Investment-grade issuance, however, is booming — running at a pace of more than $40 billion for a record third week, according to Informa Global Markets.

"High-grade issuance is off the charts," said Stephen Antczak, head of U.S. credit strategy at Citigroup. "It completely turned off for a period of time in February, but now it's back on. You're either completely on or completely off."

The high-yield market was early to show signs of strain that drove a sell-off in risk markets in January and February, and it is sometimes seen as an early warning for stocks. Oil, which was collapsing, has a heavy influence on the market since many energy producers are heavily levered.

"We were way oversold. It was basically the kind of market that was set up for the U.S. economy to go into recession. That's what spreads and yields felt like," said Richard Lindquist, head of high yield at Morgan Stanley Investment Management. "We got some better economic data. That helped convince the market we're not going into a recession."

Lindquist said the recovery in oil was a big factor, and while it is unpredictable, it will remain the key to the market for now. West Texas Intermediate crude futures were trading at around $36 per barrel Tuesday, $10 above the Feb. 11 low.

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Analysts say inflows into bond funds and ETFs could also help open the market for new issuance. Even if inflows do not match the record $5 billion that went into high-yield bond funds and ETFs in the week ended March 2, demand in the secondary market could help open up the primary market, they said.

High-yield issuance so far this year is just about 25 percent of last year's level. According to Informa, there was just about $13.8 billion of issuance in the junk bond market as of Monday, compared to $57 billion at the same time last year.

"I think it will open. It's just a matter of time. In my mind, it's a market that's closed and people that need money and need to refinance may not be able to. But in the near term, the market needs paper. I don't think it would be a bad thing if you brought a few good companies to market," said Antczak.

In the high-yield market, Level 3 issued $775 million in bonds Tuesday, and Gamestop came to market last week, according to Informa.

The Yield Book high-yield index is currently yielding 8.16 percent, down from near 10 percent in early February. When energy names are excluded, the yield is 7.5 percent, according to Citigroup.

Antczak noted that some energy companies were able to issue stock in the secondary market, and the higher-quality names should ultimately be able to issue debt in high yield if oil stabilizes.

"The fact that the market was 100 percent shut and now it's not, there's no way to not think that's positive. So valuations were disconnected to the fundamental backdrop and fundamentals improved, and now they're a bit closer to where they should be," he said.