1 #701 08/10/2014 14h41
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Volià Sissi, bonne synthèse reçue de la banque :
Why have US and European HY bonds fallen in price over the late summer?
Signet has had meaningful exchanges with several high yielding bond and loan managers over the last few days. As you are probably aware, the price of HY bonds has sold off 1-3% in August-September. If you would like a summary of what drove HY bond prices over the summer, please read below.
But first of all, the managers say that it seems that a lot of the weak hands that had been in HY (in Europe and the US) have been cleared and that the technical situation has now improved over the past few days. They say that currently, despite weak equities, HY is starting to be resilient, both in the US and in Europe. Read on.
To recap, there were plentiful reasons that explain why the European and US HY markets have been under pressure since mid-June when they peaked (Asian markets have been much more resilient). The first reason is that the HY markets rose “too far - too fast” during Q4 last year and the first half of this year, leaving them vulnerable to potential shocks in investor confidence.
The second is that July was a very heavy month of new supply of HY bonds in Europe, as was August /September for the US new issue market. New issuance has now tapered off. This was especially the case in lower quality bonds that the markets found harder to digest at a time when liquidity and risk appetite tended to be lower, like this past summer.
The soft technical patch in Europe was exacerbated by a weakening European economy, mounting tensions in Ukraine as well as the Espirito Santo saga. This led markets to weaken throughout July and into the second week of August, when the positive resolution of the BES story (for senior bondholders at least) combined with the de-escalation in Ukraine led it to rebound.
With the rebounding backdrop and Mario’s Draghi dovish speech at Jackson Hole, it seemed that September was set to start on a strong footing. However, an unexpected bankruptcy in the UK retail space (Phones4U) created pain in the market and dramatically weakened risk appetite in European HY. At the same time, in the US, new supply wanting to get issued before the Fed might start to raise rates weighed on the markets. The technical weakness in US HY (which faced weeks of large retail outflows) exacerbated the European HY situation and pushed the market lower.
So, the reasons behind European and US HY weakness were plentiful. And then the markets were further compromised last Friday when Bill Gross announced his resignation from PIMCO, the largest bond house in the world. In an already weak market, this created a small panic in some parts of the market. Bottom line, you could say that the combination of:
· a heavy and hard to digest primary pipeline during June-September,
· deflation fears in Europe,
· idiosyncratic credit stories in Europe (BES, Phones4U),
· fears of earlier than anticipated rate hikes in the US,
· flow rebalancing due to the USD strength,
· and angst around the impact of Bill Gross resignation
led to the mini perfect storm that the US and European HY markets faced in September. Again, Asian USD bonds were much less impacted as they were much less owned.
But investment managers now conclude, as we said above, that it seems that the weak investment hands in HY bonds (in Europe and in the US) have been cleared out and that the technical situation is improving in recent days. Currently managers report that HY appears resilient, both in the US and in Europe, and they are buyers at these levels.
We hope this adds some color to your perception of the HY market. Note that available yields in the US are about 1% greater than they were mid-summer on short duration portfolios.
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