Read of the Day: Can we Still Call it “High Yield” Debt?

Good overview here from the Reuters Alpha Now Research team on the current unusual state of the junk bond market:

“The junk bond, or high-yield bond, universe has seen yields decline steadily in both absolute and relative terms, creating a financing bonanza for companies whose credit rating is below investment grade and for the banks underwriting their debt issuance. But questions about corporate earnings may provoke questions about whether investors’ hunger for interest income has driven valuations too high, and yields too low.

Yields on so-called junk bonds have hit almost surreally low levels over the course of 2012, due to a combination of the intense hunger for income on the part of investors and the equally astonishing level of yields on Treasury securities. The spread between those ‘risk free’ Treasury notes and their junk bond counterparts fell in mid-October to only about 531 basis points, meaning that many companies with a below-investment grade rating were able to snag financing on terms that an investment-grade issuer would have been happy to acquire throughout much of the last decade. An average ‘junk bond’ issuer (as measured by the Bank of America Merrill Lynch U.S. High Yield Master II Index) can expect to raise new funds in exchange for an annual yield of less than 7% as of the end of October.”

Read the full piece here.


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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • Geoff

    This is one area where one could argue that QE has been effective. By forcing investors out the credit spectrum, thus increasing the demand for high yield bonds, it has allowed many smaller companies to tap the market that might not have been able to otherwise. At least not at such low rates. If those companies use that money to expand their business and create jobs, cool.

  • Steve Wise

    More likely they will use the money to fuel a bubble and we’ll watch junk collapse just the same as all the other debt-financed bubbles have.

    I wish I were more optimistic. I’m not.

  • Austin

    There are about 6 million businesses that have between 1 and 100 employees. There are about 130 thousand businesses that have over 100 employees, and about 40 thousand that have over 500 employees. I am not aware of any business with fewer than 100 employees that sells bonds.

    The Fed’s policies have given big business a comparative edge over SMBs.

  • Geoff

    Very wise, Wise. I feel you. If the Fed is distorting the market, it will probably not end well. But perhaps it is the fault of the market for using Treasuries as a benchmark to value private securities. It is OK with me if the US govt sets their own (i.e. Treasury) rate. They have every right to set the price of their own product. But not private securities like corporate or high yield bonds.

  • Anonymous

    “The next bankruptcy cycle, whether in 2 or 3 or 4 years, is going to be one for the ages”.

  • jswede

    2 separate thoughts:

    1) HY may not be ‘cheap’ in spread, or absolute yield, but are historically so when looked at as a multiple to risk-free yields.

    2) all HY names need one thing to survive: growth. HY is a bet on recovery and growth, and at these prices/yields, a massively asymmetric one.