Peter Keenan, Senior Trader on the BlueBay U.S. Fixed Income team, discusses the current state of the fixed income markets and particularly what we’re seeing in the primary and secondary high yield markets in the US.
Watch time: 4 minutes, 20 seconds
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Welcome back to The Weekly Fix. My name is Peter Keenan. I am a senior trader on the RBC BlueBay’s Leveraged Finance team in Stamford, Connecticut.
US High Yield Markets posted a strong performance last week, with the ICE BAML index up about one point in price appreciation vs the prior week, and the option adjusted spread at 367 basis points, which is 35 tighter on the week. The index is still down about 35 cents in price vs where we began the month, and about 20 basis points wider in spread, but we’ve rallied off the post Liberation Day lows of April 7th, when the high yield index was a full two and a half points lower than the current reading, or about 94 basis points wider in spread.
Important data points in the week to come include Institute for Supply Management (ISM) and Purchasing Managers’ Index (PMI) manufacturing readings on Thursday May 1st, and the nonfarm payroll report on Friday May 2nd. Investors will closely study those reports to gain insight on whether the tariff announcements are creating a drag on the economy. Sometimes it is easy to forget in volatile markets that the markets are not in fact, the economy.
In my role on the trading desk, I often get asked by internal and external stakeholders for my view on markets. There are often two areas of focus used to gauge the health of leveraged credit markets.
The first group of questions I often get are around high yield primary markets, or new issue. When issuers are bringing new bonds to market, they become very visible benchmarks for pricing purposes and become liquid trading vehicles. When deals price tighter than initial talk or are able upsize from the initial offering amount, it is a sign of investor demand for risk. But a new issue drought can be interpreted as a signal of lack of investor demand, or at least a lack of demand at terms that are attractive to corporate issuers.
While it may be true that primary markets were shuttered in the wake of Liberation Day, we have now seen four new high yield deals come to market for nearly $7 billion of supply. All of those deals were high quality double Bs, and three of the four came last week for about 4.5 billion in size. More importantly, each of those deals price tighter than the initial price talk, with large order books, and are trading well in secondary markets.
If the markets have truly reopened, shouldn’t we see more deals? Shouldn’t there be some pent-up supply given that primary was closed for a couple weeks? All good questions. But right now, we are in blackout periods for many of our issuers who have yet to report quarterly earnings. And issuers not currently restricted may be looking at US Treasury interest rate volatility, where we have seen the yield of 10-year notes range between 4% and 4.50% this month, with corporate treasurers waiting for some more stability before locking in term financing costs. I think we will see more new issues coming soon, once those two conditions have been satisfied.
Another question I get is around liquidity and secondary market trading volumes. Excluding the easter holiday week, total secondary trading volumes for US high yield have been trending above average. If the worry is that it will be difficult to get bids from dealers on bonds we want to sell, what we are actually seeing is that high quality deals remain in strong demand by investors, and with dealers holding low inventories coming into this month, the real issue is that sourcing new risk to put money to work is the more difficult part of my job.
Thank you very much for your time and see you on the next edition of The Weekly Fix.
Key points
Sometimes it is easy to forget in volatile times that the markets are not, in fact, the economy.
Clients often focus on liquidity in the high yield primary and secondary markets.
High yield primary markets, or new issues, are visible benchmarks for pricing purposes and a gauge of market health.
This is returning to normal after drying up after Liberation Day.
Total secondary trading volumes for US high yield have been trending above average.
High quality deals remain in strong demand by investors.