Offerings in Europe that met with similar resistance earlier this month are now reaping similar gains. U.K. watchmaker Aurum Holdings Ltd., owned by Apollo Global Management LLC, sold 265 million pounds ($377 million) of five-year notes last week. It had to increase the yield on the securities by 1 percentage point and remove a controversial clause in the documentation that made it easier to pay additional dividends to its private equity owner. Those bonds, which sold at face value, are now trading above that level.
‘Balance ... Power’
Fund inflows and better market sentiment may have boosted prices on debt from American Greetings and McDermott, but more investor money isn’t necessarily good for the health of the junk-bond market, according to Henry Peabody, a portfolio manager at Eaton Vance Corp. When the market was weaker earlier this month, investors had more leverage to push back on deals that were priced aggressively, he said.
“Oddly, negative flows were positive for the health of the market,” Peabody said. “You could balance the power a bit.”
The junk-bond market has been improving, but its upward progress has been halting. Just a day after speculative-grade funds posted their largest inflow of the year in the week through Wednesday, the most liquid high-yield exchange-traded fund posted its biggest daily outflow since October 2016. Investors pulled $877 million from the iShares iBoxx $ High Yield Corporate Bond ETF, known by its ticker HYG, on Thursday. Investors often use the ETF as a short-term trading vehicle or hedge instead of traditional credit-default swaps, which means flows can swing from day to day.
And not all investors are convinced recent gains will last.
“I wouldn’t see the latest surge in high yield as necessarily a risk-on move, or any kind of broader return of euphoria to high yield,” said Patrick Flynn, a high-yield portfolio manager at Neuberger Berman with $135 billion in fixed income assets. U.S. government bonds have been weakening for much of the week, as rising commodity prices stoke inflation fears.
Energy, Stock
In recent weeks, those fears have been less of a concern in junk bonds. With crude oil trading close to its highest levels since 2014, speculative-grade bonds linked to energy have rallied, lifting the broader sector. Stock gains have also been a boon to high-yield, as the S&P 500 now has positive returns for the year, even ignoring dividends.
The junk bond market has been improving all month, with average risk premiums, or the extra yield over Treasuries that investors receive for lending money to companies, shrinking to 3.23 percentage points as of April 19 compared with 3.6 percentage points at the start of the month. Levels this week came close to their tightest since the financial crisis, according to Bloomberg Barclays index data. The debt has gained 0.24 percent in 2018 through Thursday, after having been down for much of the year.