High Yield Market: All Time Low Yields

According to both the Barclays high-yield index and the CS HY index, yields in high yield have reached an all time low of ~6.6%. Further, over the last few weeks, traders and syndicate desks have been whispering of a simply gargantuan amount of high yield and leveraged loans coming this month. Certain desks have been advocating a move to CCC assets as they still yield approximately 100 bps over their all time low seen on...wait for it...May 2007.

Being underweight any market that just rips in your face never feels good. And since many funds have been underweight both equity and speculative credit this year, many are speculating a year-end chase as funds try to catch up on performance by allocating capital to the yieldiest credits in hopes of further spread tightening.

To be completely honest, this rally has felt marginally healthy to me. There have only been a few dividend deals and you haven't seeing historically weaker investment banks or desks bringing speculative deals. Seasoned issuers are coming to market with refinancing and M&A or capital structure alterations (loans refinanced into bonds). Pricing and structure have been the real stumbling block for me over the past few months. Coupons and all in yields are definitely not compensating investors for the duration of the asset class these days and covenant quality has gotten worse and worse and worse with each deal that clears. It often feels like, in larger deals, that large players are just putting in orders because 1) They have significant cash as a result of inflows to put to work and 2) The secondary market is horribly illiquid.

Some desks are beginning to get cautious. Generally speaking, most strategist's targets for high yield returns have been hit for the year. To me this portends further tightening or at least grinding through year end (still have quite a bit of carry left for the year) or at least the election unless an exogenous event happens in interim. The balance of pessimism and optimism across markets feels pretty balanced which historically are good things for the market.

Despite this, I am sitting on a large amount of cash. My PA has gone from very long with a smattering of shorts to a large cash position combined with a few liquidations and more shorts. The only place I see pain is in the coal and shipping space (and busted IPOs that I wouldn't look at anyways). The HILO on Bloomberg (over 50M market cap) was 260 high and 16 lows. Here is a chart of the number of distressed bonds traded (distressed = over 1000 bps spread). Not terribly enticing.

I think you you begin to see more M&A come down the line (already seeing it with Plains today) and maybe some speculative LBOs or MBOs that will come with covenant lite structures and terms. All to feed the beast that have been inflows this year and a re-start of the CLO machine.

There's simply not enough blood in the streets for me to get excited. Every investment you make has some sort of beta / market component to it. Maybe that is only a very small percentage (say a liquidation or Lehman like situation) and some have a very heavy market component (think go-go-go equities). I am 100% focused on the former category right now and am paying close attention to both legacy and new bankruptcies to see if there are interesting places to play. That, and of course, shorting has been a big priority for me over the past few weeks as I look for aggressive accounting or thematic trades to play out and revaluations to occur in select sectors.

Fun times indeed. Am I the only one that is gloomy on an up day in the markets?


Anonymous,  9/11/2012  

I am of the same sentiment and similarly positioned. How are you weighting the liquidation part of your portfolio (assuming its a lot of LBHIs?)? I have been adding aggressively to these types of situations (25% of PA right now), but am always concerned about striking the right balance between the attractive low risk, certain return of these securities and the resulting illiquidity that will limit my flexibility if the markets turn down again.

Adam Block,  9/11/2012  

Doug Kass has been net short for a while

Taymere 9/11/2012  

Come on in the water's fine. Buy JRCC 470355AG3 after the Moody's downgrade that will probably come this fall. I bought last month at 52 cents/$. It will probably go lower than my entry price after the Moody's downgrade happens.

Ryan,  9/11/2012  

"...shorting has been a big priority for me over the past few weeks as I look for aggressive accounting..."

Hunter, would it be possible to do a blog posting on that? I'd be really interested to read a short thesis based on aggressive accounting. Thanks.


hunter [at] distressed-debt-investing [dot] com

About Me

I have spent the majority of my career as a value investor. For the past 8 years, I have worked on the buy side as a distressed debt and high yield investor.