U.S. High-Yield Market Outlook: Week Ending December 15, 2017

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US High-Yield was down this week by 3 bps, which is primarily caused by Treasury Curve shift.

The short-term  U.S. Treasury yields increased which moved spread between 10Y UST and 2Y UST on the minimum from 2007.

The best performing sector was Telecommunications (+19 bps). The worst performing sectors were Utilities (-31 bps) and Consumer, cyclical (-29 bps).

The outlook is based in BOFA 1,870 debt issues, which together represent c. $1.25 trln in principal amount (most of the issues are represented in HYG)

US High Yield was down by 3 bps this week primarily due to consumer sector. The diagram below shows contributions, so, the actual changes in sector price dynamics may differ. What also plays its part is different weight of different sectors in Index. So, despite stronger downfall, for example, sector’s contribution can be lower due to its lower weight.

Figure 1. Contribution of sectors to changes in BOFA High-Yield Index over the week

Source: Bloomberg Terminal, Lighthouse Research

Consumer sector (primarily cyclical) was the greatest loser contributing the most towards total 3 bps decline.

Higher yields on US Treasury has the main contribution to lower High Yield sector last week. Last week, Fed decided to raise rates a quarter point to a range of 1.25% to 1.5%. The yield on short-term UST (2-3 years) increased by 4 bps which at modified duration of 3 equaled to 12 bps price decline Currently, the difference between 2-and 10-year Treasury yields is the lowest since 2007. However, the futures market indicates that investors expect a 20 per cent chance of even three fed Fed funds rate increases.

Figure 2. Change in US Treasury Active Curve over 1 week

Source: Bloomberg Terminal

Changes in sectors from High-Yield perspective

Figure 3. Statistics breakdown by sectors

Sector Issues Weight YTM YTW Mdur 5D change
Basic Materials 154 6.97 5.39 3.91 4.11 0.08%
Communications 278 20.04 6.64 6.11 3.73 0.19%
Consumer, Cyclical 328 14.56 6.32 5.49 3.45 -0.29%
Consumer, Non-cyclical 259 15.94 6.36 5.84 3.48 -0.06%
Diversified 6 0.27 6.29 3.64 3.48 -0.17%
Energy 313 13.95 6.52 6.05 3.91 0.02%
Financial 190 10.42 5.17 4.55 3.92 -0.09%
Industrial 198 9.33 5.51 4.59 3.06 -0.03%
Technology 93 5.64 5.58 4.55 2.47 -0.05%
Utilities 51 2.89 5.78 4.90 3.33 -0.31%

Source: Bloomberg Terminal, Lighthouse Research

Communications sector started to recover last week. The main reason is that U.S. telecom regulators have voted to repeal net neutrality principles, which constrain the ability of Internet service providers to influence loading speeds for some websites or applications. Net neurality is the principle that internet service providers should not be able to charge different content providers different prices for transmitting data to their consumers. Last week, net neutrality principles were cancelled. It means telecommunications companies will charge an additional fee to move certain content at a faster speed across the fiber or cable they control. CenturyLink (CTL) bonds were the leaders- bonds increased by 2.8%-3.9% depending on maturity. However, Frontier (FTR) bonds were the worst performers. The company's bond (maturity in 2025) declined by 5% due to high leverage and poor performance of acquired Verizon assets.

Utilities sector bonds were the most stagnant last week. Sector continuied to decline primarily thanks to Firstenergy Solutions, a struggling generating company, that is currently on track to exit unregulated power generation business and instead concentrate its assets on operating as a fully regulated utility by mid 2018. FirstEnergy is dealing with declining demand and a wall of debt maturities. Two bonds of the Firstenergy continued to decline and lost 9-10% last week.

Consumer sector continues to suffer due to poor performance of the U.S. retail chains and continued pressure from online retailers. Pet supplies retailer Petsmart reported weak third quarter results. Total store sales and comp sales declined. EBITDA significantly declined in third quarter. Moreover, the management expects poor fourth quarter results. The company has more than US$4 billion leverage. As a result, PetSmart's bonds declined by 13%-20% depending on bond security type. It was the largest decline among consumer sector bonds last week.

Basic Materials sector bonds had good performance last week due to higher commodity prices. Aluminum, copper, Zinc and nickel increased by 3%-5% depending on a metal. Gold, silver and platinum prices also increased. Freeport-McMoRan's (copper) bonds and CF Industries' (fertilizer) bonds were the best performers and gained 1.8% and 2.0% respectively.

Technology sector slightly underperformed for the 3nd week. Semiconductors and data storage producers continued to underperform last week.

Energy sector bonds were relatively neutral because oil price was stable last week.

New issues on the U.S. High Yield market (December 11, 2017- December 16, 2017)

We present new issues on the U.S. High Yield market last week in the table below.

Figure 4. U.S. High Yield market new issues

Company Industy Yield Maturity Credit rating (S&P/M/F) Net Debt/EBITDA LTM CUSIP
Mattel Production of Children's toy 6.4 12/31/25 BB-/Ba2/BB- 5.5 577081BB7
Iron Mountain Real Estate 5.1 03/15/28 BB-/Ba3/- N/A 46284VAE1
Chirchill Downs Horce racing 4.7 01/15/28 B+/B2/- 3.3 171484AE8
Par Petro Oil&Gas 7.7 12/15/25 BB-/B1/- 1.7 69889MAA0
Whiting Petro Oil&Gas 6.4 01/15/26 BB-/B3/- 4.1 966387BE1
Standard Industries Roofing products 4.7 01/15/28 BBB-/Ba2/- N/A 853496AD9

Source: Bloomberg Terminal, Lighthouse Research

Thank you for reading


Vladimir Nikulin

P.S.: We welcome your comments and suggestions on other things we can add to the HY report that we intend to publish on a weekly basis.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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