The high yield new issue market came roaring back to life last week according to Bank of America’s credit strategists Michael Contopoulos and team, but despite record levels of new issuance, it appears investors are turning away from high yield credit market.
Cracks Start To Show In High Yield As Investors Turn Cautious
For the week to Thursday 9 March $17.3 billion of new high yield issuance was priced, the largest volume in two years. However, while the market excepted this new issuance, outflows, specifically ETF outflows, have caused spreads to widen. BOA’s high yield credit team writes:
“Last week was one of the busiest of the year on several fronts. Specific to high yield, the market absorbed the largest amount of issuance in two years, with $17.3bn priced, while outflows, specifically to the ETFs, caused some investors to begin to become nervous on valuations and the sustainability of what has been a drawn-out 13-month rally. As such, yields have backed up 44bp since the first of the month, while spreads have widened 32bp.”
What’s more, BOA’s monthly Credit Investors Survey revealed investors are significantly more bearish towards high yield valuations than they have been at any other time since 2008. The net proportion of investors expecting wider spreads one year from now jumped to 76% from the previous 23% in our January reading. Michael Contopoulos comments that this figure represents the greatest proportion of investors that they expect wider spreads since May 2006, when high yield was trading at just 288 bps.Similarly, a net 85% of investors now find spreads overvalued compared to 67% in January, the highest figure since April 2007. With bearish sentiment rapidly gaining traction the survey’s respondents indicated that they have adopted a net underweight stance on high yield for the first time since 2008.
Contopoulos opines that this rise in bearish sentiment may not be a bearish signal to sell high yield based on past trends. “Case in point, the last time investors were this convicted on spread widening and found spreads more overvalued, high yield actually tightened by 22bps over the next year,” he writes. “Similarly, the last time a net proportion of respondents were underweight (December 2008), high yield returned an all-time best 65% over the next 12 months” Contopoulos continues.
