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Recent yield increases for US Treasury and German Bund notes have impacted the high-yield market.

A shift away from issuer-friendly markets

Yields on US Treasury notes reached historical heights this past week, increasing for all tenors; the 2-year Treasury yield hit the highest level since September 2008, while the 10-year yield hit the highest in 4 years. The German Bund rate followed suit and hit the highest level in more than 2 years. Global benchmarks started trending upwards after data showed that US inflation rose more than forecasted in January 2018, strengthening expectations of a faster increase in interest rates.

Headwinds for high-yield issuers

Market volatility and rising yields are already impacting the high-yield market. Algeco Scotman priced its $1.8bn bond (€750m in euro tranches and $825m in USD tranches) on February 6, after delays from investors’ additional covenant demands, and landed on higher prices than originally guided: the USD tranches closed at 8.5% (B- by S&P) and 11.5% (CCC by S&P), though the guidance was 8.0% and 10.0%. Facing adverse market conditions, some companies have postponed or even cancelled their issuance this year. Among them is JW Aluminum, who postponed its announced $300m secured high-yield offering earlier this month.

Maturing debt looms

In a low interest-rate environment, high-yield bond issuers were in a favorable position to borrow cheaply. However, the recent wave of interest rate increases may push them into a difficult position if they must soon repay debt; companies face $1.26tr worth of debt in the US high-yield market and €241.3bn in the euro high-yield market due from now until 2022.

-Written by Zita Gombar, Dealogic Research


Data source: Dealogic, as of February 19, 2018

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