The Bloomberg Barclays High Yield Index was down -0.6% yesterday,* following a mixed Monday where we saw the large index flow names weaker, while other names were holding their ground despite dollars leaking out of the asset class. The BB rated sector of the high yield indexes have been the weakest of late primarily due to their smaller coupons in this uncertain interest rate cycle.
Even though the 10-year Treasury yield continues to drift lower, here at 2.85% today, money continues to flow into floating rate bank loans. I don’t believe it is because the smart money is betting on a flat or steeping yield curve as the Fed raises rates, but because the advertising spend by the big ETFs and mutual funds is touting floating rate debt. It seems that almost every time I see a financial commercial, it is for floating rate or interest rate hedged products, and so the lemmings go. Also, month-to-date, 47 US CLOs (collateralized loan obligations) have priced totaling $23.7B, which is keeping a bid under the loan paper as Treasury yields fall. If you do some work of what kind of demand is out there for yield, you will see that the US longer maturity debt is in high demand and the aging population needing income is growing in record numbers.
The high yield bond new-issue market woke up yesterday with three deals coming to market, with two of them in the energy sector, as oil prices moved above $70. There are still 10 issuers lined up on the forward calendar for ~$8B in new paper.
The retail sector has been leading the performance train for bonds in the various index’s while energy bonds haven’t moved much despite oil’s rise. Oil is up big again today as the EIA confirmed a big drawdown and, with the US pulling out of the Iran deal, the US does not sanction Iran but puts pressure on buyers of Iranian oil as per whether they want to do any business with the US.