Great Performances By High Yield, One Time Or Early Signs?

by: S&P Dow Jones Indices

By Kevin Horan

As with the weather for the northern hemisphere, the U.S. high yield market seems to be making a comeback. The 0.54% return in February for the S&P U.S. Issued High Yield Corporate Bond Index appears to be the green shoot of return for high yield bonds. March 2016 followed the prior month's gain with a blossom of its own. The index returned 4.5% for the month, which was the largest monthly return since October 2011's return of 5.07%. Year to date, the index returned 3.36%, which is refreshing to high-yield investors, who, before this month, had not seen a positive year-to-date return since November 2015.

The S&P 500 High Yield Corporate Bond Index performance behaved similarly, returning 3.43% for March, which was the index's largest return since a 3.86% return in October 2011.

Source: S&P Dow Jones Indices LLC. Data as of March 31, 2016. Past performance is no guarantee of future results. Table is provided for illustrative purposes.

Source: S&P Dow Jones Indices LLC. Data as of March 31, 2016. Past performance is no guarantee of future results. Table is provided for illustrative purposes.

High yield option-adjusted spreads (OAS) for the year have double-peaked, reaching highs of 907 and 883 bps on January 20, 2016 and Febuary 11, 2016, respectively. Since then, the OAS spread has tightened by 180 bps, giving bankers a window of opportunity to work with issuers in providing more debt to the market before any possible additional rate increase by the Fed. According to IFRMarkets, 57% of Q1 2016 high yield issuance was sold in March, and at USD 6.3 billion, with the last week of March being the busiest for 2016. Next week, an additional USD 3-5 billion is expected. Notable new issues for the week were included and are as follows:

  • T-Mobile USA, Inc. (NASDAQ:TMUS), with USD 1 billion, of an eight-year maturity and a coupon of 6%.
  • Western Digital Corp. (NYSE:WDC), with USD 3.35 billion, of an eight-year maturity and a coupon of 10.5%.
  • HD Supply Inc. (NASDAQ:HDS), with USD 1 billion of an eight-year maturity and a coupon of 5.75%.
  • BPCE S.A., with USD 750 million, of a six-year maturity and a coupon of 8.25%.

Exhibit 2: OAS History for the S&P U.S. Issued High Yield Corporate Bond Index

Source: S&P Dow Jones Indices LLC. Data as of March 31, 2016. Past performance is no guarantee of future results. Chart is provided for illustrative purposes.

Source: S&P Dow Jones Indices LLC. Data as of March 31, 2016. Past performance is no guarantee of future results. Chart is provided for illustrative purposes.

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