Junk Bonds Suddenly Don't Look So Good Anymore
June has been a brutal month for bonds but particularly in the high-yield space, where issuance has cooled after a record run.
Junk bond volume has slowed to $7.1 billion this month, the slowest pace since December 2011 and about one-fifth the average monthly total previously in 2013, according to Dealogic.
The sharp diversion comes amid a record run of bond outflows and as the market contemplates the future of Federal Reserve monetary policy. For the year, U.S. junk issuance is at a record $195.2 billion.
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In remarks last week, Fed Chairman Ben Bernanke said the central bank's $85-billion-a-month bond-buying program would slow later this year if economic data continue to improve.
That triggered a huge selloff in bonds and helped contribute to a jump in yields, sending the benchmark 10-year Treasury note past 2.5 percent at one point.
At the same time, high-yield bond spreads have widened by 14 percent against the benchmark.
The SPDR Barclays High Yield Bond exchange-traded fund has declined 5 percent over the past month, though it rose in Tuesday trading. The fund has seen $2.7 billion in outflows year to date, according to IndexUniverse.
Another popular junk ETF, the iShares iBoxx $ High Yield Corporate Bond, has seen nearly $2 billion in outflows this year and is off 3.4 percent over the past five days alone.
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Investors pulled $333 million from high-yield funds last week, according to Lipper.
While correlating to the general trend in fixed income, the slowdown in the junk bond business bodes especially troubling signs for investment banks, which have relied on the debt markets for fully one-third of their business this year, the highest percentage in 10 years.
Dealogic data show that globally and in the U.S., investment banking revenue growth declined in the second quarter.
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In the U.S., revenue slipped to $8.1 billion in the second quarter after hitting a six-year high of $9.2 billion in the preceding period. Globally, investment banking revenue of $15.9 billion in the second quarter was the lowest total in a year.
Debt market revenue globally of $11.4 billion thus far in 2013 accounts for 33 percent of the $34.2 billion total, the highest level since 2003.
Investment-grade issuance also has been at a record high, with $888.6 billion issued thus far.
But bond pros worry that trend could be coming to an end as well.
"If rates continue to increase, we could see massive outflows from high grade bond funds and a much more disorderly rotation with significantly wider credit spreads," Hans Mikkelsen, fixed income strategist at Bank of America Merrill Lynch, said in a note. "This scenario remains clearly the biggest risk to high grade this year—and with the rapid increase in interest rates we have witnessed the probability of such scenario has increased."
With mergers and acquisitions activity slumping, banks will need a healthy debt market to keep profits flowing.
By CNBC's Jeff Cox. Follow him @JeffCoxCNBCcom on Twitter.