Corporate credit prices drifted higher this week as geopolitical risks receded, oil prices rallied and volatility neared a record low.1 High yield bonds resumed their upward momentum, regaining ground lost late last week as the commodity price decline and low all-in yields weighed on sentiment. High yield bonds returned approximately 0.26% this week despite recording the largest weekly outflow in two months.2 High yield bond mutual funds posted $1.7 billion in outflows for the week ended May 10, which brings the year-to-date outflow to nearly $9.6 billion.3 Nevertheless, high yield bonds have continued to generate solid returns in 2017 and are now providing year-to-date returns of approximately 4.0%.2 Senior secured loans also trended higher this week, with bank loan mutual funds posting a modest inflow, which extends the streak of weekly inflows to $21.3 billion over the past 26 weeks.3 Year to date, senior secured loans are providing returns of approximately 1.8%, with CCC rated loans continuing to outperform the broader benchmark.4 Year to date, CCC rated senior secured loans have returned approximately 5.8%, easily outperforming both the BB rated (1.1%) and B rated (1.7%) categories.5
U.S. crude oil prices rose this week, rebounding from a five-month low, after data showed U.S. oil supplies fell for a fifth straight week.6 In the largest weekly decline this year, oil inventories declined by 5.2 million barrels in the week ended May 5 against analyst expectations of a 1.8 million barrel decline.7,8 The unexpected drawdown came amid further evidence that OPEC is largely sticking to the production quotas members agreed to on November 30.9 Despite an uptick in commodity price volatility over the past few weeks, energy credit has held relatively steady. Over the past month, high yield energy bonds and energy senior secured loans have generated total returns of approximately -0.2% and -0.3%, respectively.10,11 For further perspective, high yield energy bonds and energy senior secured loans have generated returns of approximately 25.1% and 34.5%, respectively, over the past 12 months.10,11 Amid broad credit market spread tightening, high yield energy bonds are currently yielding 6.5%, compared to 5.7% for the broader high yield bond benchmark.12,13 Energy senior secured loans currently yield approximately 11.7%, compared to 6.1% for the broader senior secured loan index.14,15
Slow and steady
In a relatively light week of economic releases, Friday’s U.S. consumer price index and retail sales were among the calendar’s highlights. CPI inflation increased 0.2% in April, broadly in line with expectations.16 Year over year, CPI rose 2.2% during the 12-months ended April 2017, slowing from 2.4%.16 Core CPI, however, was weaker than expected, rising 0.1% in April and 1.9% over the last 12 months.16 Meanwhile, U.S. retail sales rose 0.4% in April.17 While below analyst expectations, U.S. sales grew at the strongest pace in three months, underscoring the expectation that consumption growth will strengthen in the second quarter. While this week’s data continues to indicate slow, albeit steady, U.S. economic growth, it did little to alter ongoing expectations of another rate hike at the conclusion of next month’s FOMC meeting.18 Labor markets remain strong, with last week’s solid nonfarm payrolls report providing further evidence that the U.S. economy is nearing full employment.19
Chart of the week: Refinancings spike in 2017’s issuer-friendly environment
- Spreads on high yield bonds and senior secured loans have declined approximately 50 and 16 basis points, respectively, from the beginning of 2017.2,4 For high yield bonds, spreads are down more than 500 basis points from their highs in February 2016.2
- Taken together, these conditions have led to an extraordinarily issuer-friendly environment. Driven by refinancings and repricings, for example, the first quarter of 2017 saw the highest volume of senior secured loan issuance ever.20 Year to date, approximately 80% of new senior secured loan issuance has been earmarked for refinancing or repricing, a jump of more than 55% from this point in 2016.20
- Issuance volume within the high yield bond market is lighter than in the senior secured loan market, though it is well ahead of last year’s pace.20 As the chart indicates, the majority of the new-issue activity year to date has also been driven by refinancings.
- While investors have experienced strong returns in both asset classes, yields have declined in 2017 amid ongoing demand as investors continue to seek out higher-yielding investments in today’s low interest rate environment.
1 Federal Reserve Bank of St. Louis, http://bit.ly/295DSwP.
2 Bank of America Merrill Lynch U.S. High Yield Master II Index.
3 Thomson Reuters Lipper.
4 Credit Suisse Leveraged Loan Index.
5 Credit Suisse Leveraged Loan Index (CCC rated, BB rated, and B rated components).
6 Federal Reserve Bank of St. Louis, http://bit.ly/292Tgue.
7 U.S. Energy Information Administration, http://bit.ly/1V2gPZQ.
8 MarketWatch, http://on.mktw.net/2qZHolw.
9 MarketWatch, http://on.mktw.net/2psrioa.
10 Bank of America U.S. High Yield Energy Index.
11 Credit Suisse Leveraged Loan Index (energy component).
12 Bank of America U.S. High Yield Energy Index (yield-to-worst).
13 Bank of America U.S. High Yield Master II Index (yield-to-worst).
14 Credit Suisse Leveraged Loan Index (energy component, based on a three-year maturity).
15 Credit Suisse Leveraged Loan Index (based on a three-year maturity).
16 U.S. Department of Labor, http://bit.ly/2jKLr2f.
17 U.S. Census Bureau, http://bit.ly/Y4FaTF.
18 Bloomberg, based on CME data.
19 U.S. Department of Labor, http://bit.ly/2iYbHWM.
20 J.P. Morgan High-Yield and Leveraged Loan Morning Intelligence, April 28, 2017.
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