NEW YORK, Feb 12 (IFR) - Investor appetite for US junk bonds has rebounded strongly in the past few weeks, as stronger oil prices and better liquidity have helped draw billions of dollars back into the asset class.
That in turn has narrowed the gap between cash prices of high-yield bonds and the cost of protection on those bonds to just 30bp, according to Barclays.
That’s in sharply from an 80bp level in mid-December, only a few weeks ago, as the buy-side sees less to fret about in lower-rated debt offerings.
“The cash/CDS basis in high-yield was looking increasingly out of whack over the past month and a half,” Barclays credit analyst Jigar Patel told IFR.
“But attractive valuations have finally brought back demand to cash that had been lacking since August.”
What appears to be at least a temporary floor for oil has played a role in changing the mood, with US crude back as high as US$51.48 on Thursday from US$43.50 earlier this month.
Yet Patel said that was only part of the story.
“Most thought the flight out of cash was driven by falling oil prices, and certainly that played a role,” he said.
“But we believe this has been more about liquidity concerns, and we see those concerns diminishing as fundamentals combine with a return of retail flows to bring liquidity back.”
Whatever the mix of causes, the rate of speed with which cash has flooded back into the high-yield space has been nothing short of astonishing.
Between January 22 and February 11 alone, according to data from fund-tracker Lipper, corporate high-yield bond funds saw an inflow of more than US$8.3bn.
In the month of December, by contrast, there was a more than US$7.1bn outflow.
And the rapid improvement in the technical backdrop has ensured that high-yield deals are getting a warm welcome in the primary market.
The past three weeks have seen the three largest high-yield dollar deals of the year so far - from Altice (US$3.54bn), Dollar Tree (US$3.25bn) and GTECH (US$3.2bn).
GTECH saw orders of US$17bn, while Altice amassed a whopping book of around US$60bn.
The defensive swing towards credit default swaps began last summer as the plummet in oil prices reignited fears about liquidity.
The tough market conditions prompted issuers to hold off on new bond deals. But the ensuing glut in supply, especially in high quality paper, has only helped reinvigorate demand.
Indeed, few other spaces are offering such attractive yields.
The yield-to-worst on the Barclays High Yield Index is currently 6.2% versus 2.99% on investment-grade corporates - and those juicy returns are only stimulating further demand.
This has been the busiest week for US high-yield issuance since October, with more than US$11bn of deals priced. And with a US$1.9bn trade from PetSmart expected next week, more supply is on the way.
“You could argue the market is a bit price-sensitive,” said one senior banker.
“But there is no sign of any indigestion yet, because accommodative policies have ensured there is hunt for yield now.”
While the reversal in attitude about high-yield has been rapid, however, the buy-side has shown it can still be selective - and some deals, particularly the smaller ones, have struggled.
“Larger, better-quality credits are very well bid, but the tougher more-levered credits are struggling,” said Marc Warm, head of US high-yield capital markets at Credit Suisse.
“Smaller deals aren’t doing as well either, as they’re a lot tougher to exit when markets turn.”
At least four high-yield deals have been pulled just since the beginning of the year, the latest a US$75m add-on for educational tech company Blackboard Inc this week.
“When we see an opportunity in a smaller deal, we demand a premium for the lower liquidity,” said Jonathan Insull, a portfolio manager at Crescent Capital.
“We’re always focused on liquidity. That is the landscape we are in after the financial crisis.”
A version of this story will appear in the February 14 issue of IFR Magazine
Reporting by Mike Kentz; Additional reporting by Natalie Harrison; Editing by Shankar Ramakrishnan and Marc Carnegie