With the increased appetite for riskier investments, US high-yield markets this year blasted off to the best start since 2014.
US high-yield volume reaches 4-year high
The prospect of a stronger US economy has boosted the interest in high-yield (HY) bonds. US-marketed HY bonds total $17.6bn so far in 2018, the strongest start since 2014 ($18.0bn). It marks a 40% increase from last YTD ($12.6bn), more than a 5-fold increase from 2016 YTD ($3.3bn).
Yields drop to record lows
Due to the increased appetite for riskier investments, the yield on HY bonds have dropped to record lows for both YTD and full-year comparisons, with 320.2bps as average spread to benchmark. This low is largely driven by deals with longer maturity (7+ years). They have been constrained by the expectation that inflation will remain low in 2018. The average yield for such deals stood at 300.0bps this YTD, down 17% from 361.2bps recorded in 2017 YTD and down 21% from the full-year 2017 average of 381.5bps.
Deals with maturity under 7 years did not fall behind. It also saw yields reach a new average low with 448.0bps, down 14% from 520.4bps in full-year 2017. In comparison, such deals are 23% lower than with maturities of 7+ years priced in 2016 (580.5bps). Bonds are considered a safer investment than a volatile stock market despite risks in the HY market.
However, if the US economy remains strong, yields will likely rise and prices will decrease—especially if inflation finally leaves the 1.5% threshold it has maintained since the financial crisis. Another factor that may influence corporate appetite for issuing bonds this year is the lower corporate tax rate from recent reforms, which may curb the enthusiasm for debt to boost shareholder returns.
Surprises in 2018 YTD rankings
Lead Left Rankings for US high-yield DCM has seen some surprises so far this year. Credit Suisse is in the lead, followed by Goldman Sachs. This is a strong beginning for two banks who ended 2017 in sixth and fifth, respectively.
JP Morgan, who led rankings in the last 5 years, has yet to join the HY activity in 2018. The bank is expected to take the lead left role of USA Compression’s issue ($725m) this month. The pipeline stands at $5.0bn in volume and Barclays is expected to lead with $3.0bn.
-Written by Raquel Mozzer, Dealogic Research
Contact us for the underlying analysis on the high-yield bond markets, or learn how to run your own reports on the Dealogic platform.
Data source: Dealogic, as of January 23, 2018