It's a small deal, but Conduent (the business processing outsourcing company being spun off by Xerox) had to raise the interest rate and lower the amount it was borrowing after failing to attract enough buyers.
Compass Point's Charles Peabody says this could be "the canary in the coal mine" for the junk bond market.
What's more, junk bond issuance from the largest three underwriters is down 21% this year, and - while the yield curve has been steepening of late - Peabody is spotting the "infancy stages" of a spread widening trade.
A change to the underlying index means the VanEck Vectors Fallen Angel High Yield Bond ETF (NYSEARCA:ANGL) at month-end will shed 7.4% of the current portfolio.
The change: A bond will need to have at least $250M of outstanding paper versus $100M previously.
It's a "positive move" meant to enhance liquidity while having a "minimal impact" on potential performance, says ETF manager Meredith Larson.
ANGL has just 104 Seeking Alpher alert subscribers, but it's been a popular fund this year, pulling in $248M, or 75% of its current AUM total. The fund's returned 22% YTD versus 12% for HYG. The bonds to be eliminated account for about 1.3% of this year's total return.
The asset surge has inspired competitors like iShares' FALN.
Covenant quality tumbled to 4.56 in May from 3.8 the previous month, according to Moody's, which rates on a one-to-five scale, with five being the worst. It was the largest single-month change on record.
Marty Fridson calls the plunge "a discouraging setback," but notes it could be due to the large amount of higher-rated junk issued in May - those high-yield bonds with stronger ratings tend to have easier covenants than the really junky stuff.
More from Fridson: "The long-run trend of covenant quality since the 2011 inception of the Moody’s series has been dismayingly negative. That tendency has been abetted by the investment banks, which compete for underwriting mandates partly on the basis of devising new loopholes."
VanEck lowers expense ratio for VanEck Vectors Fallen Angel High Yield Bond ETF ANGL from $0.40% to $0.35% to compete with recently launched iShares Fallen Angels USD Bond ETF FALN with expense ratio of 0.35%.
ANGL has an AUM of over $190M and 30-day SEC yield of 6.25%.
The $193M VanEck Vectors Fallen Angel High Yield Bond ETF (NYSEARCA:ANGL) has been a popular one in a year with plenty of fallen angels, taking in $125M of new assets in 2016 and returning 14.3% YTD vs. 5.6% for the HYG.
Taking aim at that is the new iShares Fallen Angels USD Bond ETF (NASDAQ:FALN), with a fee of 0.35% vs. 0.4% for ANGL.
Separately, iShares launches its High Yield ex Oil & Gas Corporate Bond ETF (HYXE), which removes the roughly 10% exposure to oil and gas companies in the HYG.
Jeff Gundlach gets a lot of attention for his calls - many of which prove eerily prescient - but it's only fair to point out the occasional boner.
"Do not buy a junk bond index fund," he said at what proved to be the bottom of the selloff in high yield in January. "You're going to end up selling it at a loss as they get more and more populated with distressed energy and mining issues."
The total return of HYG in the four months since is 12.55%.
It's curious given the low default rate - just 2.83% in 2015 vs. the long-term average of 3.33%. Usually low default rates mean high recovery rates.
Fridson: "This outcome has generated anxiety among high-yield portfolio managers. Has some structural change taken place, they wonder, such that investors should expect lower average recovery rates over the remainder of the present credit cycle than in the past?"
Answering his own question, Fridson says special conditions associated with the energy crash along with one large, non-energy defaulter are behind the low recovery rate. For now, there's no clear evidence that recoveries on a more general basis are lower than they should be.
A bet on U.S. junk bonds has been a big winner this year, with HYG and JNK easily outpacing broader fixed-income benchmarks, writes Ben Eisen, not to mention the S&P 500.
But one particular sector of high-yield has performed particularly well, and that's fallen angels - formerly investment-grade paper which has been downgraded to junk. The VanEck Vectors Fallen Angel High Yield Bond ETF (NYSEARCA:ANGL) is up 10% this year, including 13% in the last three months.
The thinking is pretty clear: Sentiment turns overly negative, pushing prices lower, and this goes on for awhile. Ratings agencies are the last to know, and when they finally downgrade to junk status, many funds automatically get out, forcing a final plunge in price. That's where the fallen angel investors step in.
Moody's now expects global speculative-grade defaults to hit 5% by the end of November - that's up from 4.6% forecast one month ago, and 3.8% prior to that.
Perhaps looking in the rearview mirror as it drives, the agency takes note of the oil price slump as continuing to put upward pressure on defaults. Being at least a tiny bit forward-looking, Moody's at least mentions tighter credit spreads of late as perhaps suggesting the default rate could taper.
Of 46 defaults recorded in the year's first four months, 18 were in oil and gas, and 9 in metals and mining.
In the U.S. the default rate for metals and mining companies is expected to rise to 11.5%; and for oil and gas to 10.3%.
Emerging markets: iShares Core MSCI Emerging Markets (NYSEARCA:IEMG), SPDR MSCI Emerging Markets Quality Mix (NYSEARCA:QEMM), iShares MSCI Brazil Capped (NYSEARCA:EWZ), EGShares India Infrastructure (NYSEARCA:INXX) "We like India in general as a long-term option," iShares Latin America 40 (NYSEARCA:ILF) "We're starting to see governance improvements in Latin America broadly," iShares J.P. Morgan USD Emerging Markets Bond (NYSEARCA:EMB).
Emerging-market proxies: iShares MSCI Canada (NYSEARCA:EWC) and iShares MSCI Australia (NYSEARCA:EWA).
iShares Core High Dividend ETF (NYSEARCA:HDV). iShares MSCI USA Minimum Volatility (NYSEARCA:USMV) "Now there's more uncertainty, and that's when these low-vol strategies do best."
iShares North American Tech (NYSEARCA:IGM) and iShares U.S. Consumer Services (NYSEARCA:IYC), "We still like consumer services and technology."
PowerShares QQQ (NASDAQ:QQQ), Vanguard Small Cap Value (NYSEARCA:VBR), "Blending the two doesn't tilt the portfolio too much in one direction or the other, because the combination blends small and large, growth and value."
SPDR Barclays High Yield Bond ETF (NYSEARCA:JNK), PowerShares Fundamental High Yield Corporate Bond Portfolio (NYSEARCA:PHB).
VanEck Vectors Fallen Angel High Yield Bond (NYSEARCA:ANGL), "These are viable companies, and although they've moved from investment- grade to high-yield, they're likely survivors."
"We like preferreds, via the iShares U.S. Preferred Stock (NYSEARCA:PFF)." Also: iShares International High Yield Bond ETF (BATS:HYXU).