CAM High Yield Weekly Insights

(Bloomberg)  High Yield Market Highlights

• March has priced $19.4b so far, the slowest third month since 2009
• Average March issuance has been $31b in last five years
• This will be the slowest 1Q since 2016, which was hit by WTI dropping to a more than 13-year low
• Inflows slowed a bit this week as markets stalled
• Net inflows total ~$11b YTD vs outflows of ~$18b in the same period last year
• S. high yield returns of 6.99% YTD is best since 2003
• BBs beat single Bs and CCCs with a YTD return of 6.99%
• Single-Bs beat CCCs, with YTD return of 6.949%
• CCCs YTD was 6.76%, the lowest in the high yield space
• CCCs are having best 1Q since 2012
• Leveraged loans, higher in the capital structure, have YTD returns of 3.85%
• S. junk bonds operate against backdrop of strong technicals as reflected in net inflows into retail funds and light supply, low default rate, steady corporate earnings, Fed accommodation
• Markets imply more than a 55% probability of the Fed cutting rates as early as September and 62% in October

(Reuters)  Leverage levels peaking again on US mega buyouts 

• Leverage levels on US private equity buyouts are returning to record levels and private equity firms’ equity checks are shrinking as banks underwrite more aggressive loans, safe in the knowledge that they will not be penalized by regulators.
• Average leverage levels of 6.8 times in 2019 so far are rebounding towards a recent record of 6.97 times in the third quarter of 2018, before year-end volatility cooled the market and the number fell to 6.09 times, according to LPC data.
• As leverage and the amount of debt that sponsors are piling on businesses is rising, the amount of equity they are contributing is falling. Equity checks of 35.7% in the first quarter of 2019 so far are lower than 38.7% in 2018 and 43.3% in 2017, the data shows.
• Huge highly leveraged buyout loans are contributing to the spike, including US$3.2bn of loans for travel commerce platform Travelport and a US$6.4bn dual-currency loan for Power Solutions, which backs the buyout of Johnson Controls’ battery unit.
• Current leverage ratios are the highest debt-to-Ebitda levels seen since the second quarter of 2007, before the financial crisis, when leverage also averaged 6.8 times. This is due to regulators giving more freedom to arranging banks and investors’ hunt for higher yield, market participants said.
• US regulators implemented Leveraged Lending Guidance (LLG) in 2013 to limit systemic risk. This imposed extra scrutiny on loans with leverage greater than 6 times and also required all secured debt or half of total debt to be able to be paid down within five to seven years.
• LLG was relaxed last year when government agencies said that it was guidance and not a rule, which is encouraging banks to arrange more highly leveraged deals without fear of regulatory penalties. It is also producing riskier deals and more aggressive market conditions.

(CNBC)  Bond market says not only is a recession coming, but the Fed will cut interest rates to stop it 

• Fed funds futures were pointing to a quarter point in easing, as traders said scary signals continued to emanate from the bond market
• There was an inversion in the yield curve, meaning very short rates rose above longer 10-year note rates, a fairly reliable recession signal
• Traders say the bond market may be overreacting, while stocks seem to be ignoring the recession warnings and fears the Fed will have to jump in with one or more rate cuts to stop the economy from rolling over
• One strategist commented that he believes some of the moves in the market Monday were more about technical signals and short squeezes than real fear about recession. The Fed changed the tone in markets significantly when it was even more dovish than expected and cut its rate forecast to just one for this year from two.

(Bloomberg)  Here’s Why U.S. Bond Yields Plunged So Much Over the Past Week

• The Federal Reserve’s surprise policy shift last week shook markets, but, even still, the intensity of the ensuing drop in U.S. bond yields has puzzled many observers. A massive wave of hedging in the swaps market helps explain the scale of the eye-catching move.
• Treasuries rallied after the Fed signaled it was done raising interest rates for the moment, driving yields on 10-year notes down to levels last seen in 2017. That forced two sets of
  traders — those who had bought mortgage bonds and those who had bet markets would remain calm — to turn to derivatives markets to tweak their portfolios or stanch their losses. They snapped up positions in interest-rate swaps, pushing Treasury yields down even more.
• What’s the evidence? While yields on 10-year Treasuries declined to as low as 2.35 percent, the rate on similar maturity swaps dropped to as little as 2.30 percent, according to data compiled by Bloomberg. The 10-year swap spread, as the gap between the two is known, had shown the swap rate at a premium for nearly all of the past year until last week. But that has now flipped to a discount and the gap has gone to a level unseen since 2017, indicating a flurry of activity in the derivatives market.
• The Treasuries rally and resulting volatility surge quickly burned those who had sold options, pressuring them to hedge in the swaps market by receiving fixed rates. That’s tantamount to going long Treasuries and is a profitable trade if yields keep falling. The intensity of that trading — along with the actions of mortgage investors — accelerated the drop in Treasury yields.