So far this year, high-yield bonds have proved resilient, offering a “relatively quiet haven” amid a combination of slower issuance and stronger earnings, Bank of America Merrill Lynch said in a note last week.
The bank pointed to a slowdown in the issuance of high-yield bonds, also known as junk bonds, so far this year as a partial explanation. It noted that year-to-date volumes are down 22 percent from 2017 and it estimated it would be 17 percent lower by year-end.
“This creates a nice technical tailwind for the market, all else being equal. The qualifier at the end of this sentence is key, however, because not all else is equal,” it said. “Our data shows that the demand side of equation has shrunk as well, with US$19 billion outflows from retail and US$5.6 billion from institutional funds. Thus, the gap in demand, at US$24 billion, meaningfully offsets the US$38 billion gap in issuance vs last year.”
But it added that the slower issuance was bolstered by stronger earnings, which improves leverage metrics among issuers.
BofA-ML also noted that fundamentals favor the high-yield market, which has grown more slowly than other debt markets, citing data showing that over the past five years, the investment-grade market has grown by 70 percent, loans have grown by 44 percent, emerging-market corporates by 43 percent and U.S. high yield by only 15 percent.
“Being at the epicenter of the last default wave in energy in 2015-2016 has helped the high-yield market come out with a relatively better balance sheet on the other end, which is a natural outcome of a cycle,” it said.
“These defining features help the high-yield market better withstand volatility that has impacted other related asset classes in recent months. The biggest winners of easy monetary policies –those areas that have seen the greatest growth in debt – are now on the losing end of their withdrawal,” it added.