High yield bonds were down a bit yesterday, as all markets remain volatile, and are a bit weaker again today. Despite the volatility and the big swings in the 10-year Treasury yield, three new-issues priced yesterday for $1B in proceeds. There are still a half dozen on the calendar with more lining up behind that. Even with oil lower for a fifth straight session, energy names are leading in the new-issuance category.
Loans continue to have inflows, but how long will this last? We believe the loan funds may face an issue going forward. To provide liquidity for redemptions they generally have a credit facility in place to fund cash redemptions until loans can be sold. The cost of these LOCs may be going up pretty dramatically as Libor rates are rising, as are Treasury yields. This can cut into the returns of the loan funds if there are elevated redemptions, thus something we believe investors should consider as they look to hedge their interest rate risk.
If rates continue to rise, we don’t believe you should fret, as high yield bonds have historically been a good place to be positioned (see our piece, “High Yield in a Rising Rate Environment”). In an environment of rising earnings and a strong economy, we are seeing a low corporate default rate environment and Moody’s has reiterated this again this week. The new-issue credit markets are open as there remains a demand for yield. Insurance companies and pension funds are the two industries that suck up the most demand for high yield and that is not going away in our lifetime.