This Week in High Yield

Markets were better across most asset classes this week, as a move towards a resolution in Europe caused much of the fear in the market to subside for the time-being. The spreads on the Bank of American Merrill Lynch High Yield Master Index tightened 66bps this week to 789bps, while the yield came in 59bps to 9.19%. Over the same period, the return on the BAML High Yield Index was 2.55%.¹

High yield bond mutual funds and ETFs reported an inflow of $635mm into the asset class this week (according to Lipper), the fifth inflow out of the last six weeks. Year-to-date inflows in to these high yield funds market now stand at $2.3 billion. While flows once again turned positive for the week, the primary market continues to be slow with only two deals pricing this week for a total of $575mm. Importantly, one of the deals that priced late this week was a CCC deal (Beagle Acquisition Corp), albeit at a sizable yield of 11%. This is still a good sign for the health of the high yield primary market to see a CCC deal get done, and trade up 3 points on the break.

The high yield sell-off had become exasperated over the last several weeks, as many factors contributed to pushing yields and spreads through an important level historically for the asset class. The combination of fundamental economic concerns over stress in Europe and a potential global recession, combined with the technical stress on the market because of outflows from the asset class and the dealers stepping down their commitment to high yield bonds, caused spreads to push out to over 900bps and yields to move wider than 10% on October 4^th,.  These levels have quickly rallied back to a spread level of 789bps and a yield of 9.19% by the end of this week, returning 4.17% over this period.²

¹ Data sourced from Bloomberg.

² Yield, spread, and return statistics are for the Bank of America Merrill Lynch High Yield Master Index.  Return references the period from October 4-October 14, 2011.