In This Issue:
- Editor’s Column – High Yield Market is like Indian Cities, No Infrastructure Backbone
- US Junk Bonds Gain on UST Yield Curve Flattening
- Weekly Issuer Data – AA and Below
- Rating Upgrades, Downgrades, and Other Data
- Current Quotes – Corporate Bonds
- Other Data
Editor’s Column – High Yield Market is like Indian Cities, No Infrastructure Backbone
The single biggest issue plaguing Indian cities is the lack of infrastructure backbone that is unable to support new constructions, rise in number of vehicles and increase in population. Hence the cities crumble on natural calamities.
The high yield market in India is facing a similar situation as Indian cities. The market is growing fast, with rising size and volume of issuances. There is strong demand from credit risk funds of mutual funds that have been the fastest growing segment in the non liquid, fixed income category. There is also strong demand from non institutional investors including PMS, AIF, family offices and HNIs.
However given the size of the high yield market, estimated at over Rs 1 trillion and the pace at which it is growing, there is a clear lack of regulation, information, liquidity and transparency in the market. The high yield market is under the overall umbrella of the corporate bond market but the fact that there is lot of public money invested in this market through mutual funds, PMS and AIFs and that this market is prone to high risks in stress times, regulators require a much better understanding of this markets as defaults wipe out capital. Unlike in developed markets, domestic investors believe they are protected against any credit risk.
High yield markets across the world by nature are not very liquid and transparency is low as they are not as actively traded as more liquid bond market. In India, given the nascent but fast growing market, transparency is extremely low and price discovery is an issue. On the information side, apart from credit rating of the issuer, there is no other independent research on issuers, leading to a lack of information in this market.
Search for Yields is attempting to provide more information on the High Yield Market but there should more efforts from market participants, regulators and exchanges to improve the market infrastructure, lest the markets crumble in times of extreme stress.
We have space where transactors can place their Bids or Offers for High Yield Bonds.
Please do send your comments to email@example.com on this newsletter, which will help us better the offering as we go along.
US Junk Bonds Gain on UST Yield Curve Flattening
The UST yield curve has flattened ever since the Fed first started hiking rates in 2015. The yield curve has shifted up but the 2*10 segment of the curve has flattened, suggesting that the Fed normalising path is smooth with a buoyant economy and lack of higher inflation expectations.
The biggest gainers apart from US equities since 2015 has been US junk bond yields and spreads that have fallen sharply. Healthy economy coupled with strong rise in small cap stocks has helped junk rated borrowers to raise funds at lower and lower yields and spreads, which is also a factor in fuelling a stock rally.
The question is, will junk bond yields stay down at lower levels or will rising rates place pressure on the yields? Till such time the economy is showing good strength, the junk bond market will thrive, and at the moment there are no indications of a US economy downturn.
US Junk Bond Yields & UST Yield Curve
Federal Reserve in December 2015 raise its benchmark interest rate by 25 bps for the first time since the financial crisis of 2008. In June 2018, Fed raised its benchmark rate for the 7th time in three years. The Fed’s efforts to raise interest rates has not affected the whole market. In the bond market, yields of longer-dated securities have not risen as sharply as yields of shorter maturity securities(Chart 1). The spreads between US 10 year & US 2 year treasury is at its lowest level in past 5 years. Short term bond yields follow the rate hike cycle but the long end bond yields are contained on lack of long term inflation expectations.
However 10-year yields have risen since the Fed started getting serious about rate hikes, but the junk bond yields have since fallen (Chart 2&3). In December 2015, US 10-year bond yields were in a range of 2.14 t0 2.26% while US junk bond yields were in a range of 16.60% to 18.15% and currently US 10-year treasury yield is around 2.85% while Junk bond yields are around 10.04%.
In other words, despite the Fed rate hike, the junk bond bubble has gotten bigger and markets are not yet showing any signs of second thoughts.
The difference in yield between junk bonds and US 1treasury yields is how much investors insist on getting paid for taking more risks. When the spread narrows it means risk premium shrinks and investors are chasing yields and are taking larger risks for higher returns.
In December 2015, the spread between the US Junk bond yields and US 10 year treasury was in a range of 1445-1588 bps and it rose to levels of 2000 bps in February 2016. In June 2018, the spreads were at levels of 647 bps and have risen to 719 bps as of the beginning of July 2018. Spreads have halved in the last 3 years.
Why Junk Bond Yields are unaffected by Fed Rate Hike- Energy companies including those involved in crude oil exploration, services, production, and refining are among the high-yield bond issuers. Hence when crude oil prices fell to its lowest level of 29 dollars/barrel in 2016, Junk bond yield spreads rose to 2000 bps. The sharp decline in crude oil prices led to defaults among high-yield bond issuers from the energy sector.
At present, crude oil prices are strong and are trading above 70 dollars/barrel, which augurs well for Energy companies. Hence Junk bond spreads have fallen in the last 3 years.
Improvement in US Economic data has also helped junk bond issuers, US GDP growth is strong and GDP expand at 2.8% in Q1 2018, unemployment is at historically lows, manufacturing data and business confidence have also improved over the last 3 years. When the economy is strong, investors risk premium shrinks and small-cap and mid-cap companies balance sheets improve, which leads to falling junk bond yields (Chart 3&4).
Above given bonds are offered by Derivium Tradition Securities (India) Pvt. Ltd on 5ththJuly
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