High-Yield Bonds Are on a High, But Investors See a Comedown

(Bloomberg) -- The U.S. high-yield bond market is enjoying a reprieve. Some are seeing it as only temporary.

Investors poured $2.97 billion into junk bond funds for the week ended April 18, the biggest for the year, according to Lipper Fund Flows data released Thursday. While a calmer market lured investors back to the debt, investors remain wary amid ongoing geopolitical tensions and rising rates that the high may be short-lived.

“I wouldn’t see the latest surge in high yield as necessarily a risk-on move, or any kind of broader return of euphoria to high yield,” said Patrick Flynn, a high-yield portfolio manager at Neuberger Berman with $135 billion in fixed income assets. “High yield has done what it’s supposed to do, which is absorb rising rates.”

The extra yield investors demand to hold sub-investment grade debt dropped 46 basis points, or 0.46 percentage point, from the start of April through Wednesday, according to Bloomberg Barclays index data. Fears of a trade war have subsided while oil prices rallied, spurring more positive sentiment that spread to the new issue market. Junk-rated companies sold almost $14 billion of bonds this month, data compiled by Bloomberg show. While lower than March, seasonally a busier period for sales, it’s almost double the amount issued for the same period in February.

High-Yield Bonds Are on a High, But Investors See a Comedown

The premium required by high-yield bond investors was 3.14 percentage points on Wednesday, close to the lowest level since the end of the financial crisis. John Yovanovic, a high-yield portfolio manager at Pinebridge Investments, says that spreads could go below 310 basis points this month. Crude oil prices have risen more than $6 per barrel and are approaching $70 for the first time since late 2014.

“You sort of set the stage for the snap back,” said Yovanovic. “But now you’ve got supply and everybody’s chasing the same paper. I can’t imagine this is sustainable.”

New deals from insurance brokerage Hub International Ltd. and chemical producer OCI NV have drawn substantial orders and priced at the lower end of the ranges that underwriters initially discussed, said Scott Roberts, head of high-yield investments at Invesco Ltd. That’s a stark change from offerings from McDermott International Inc. and American Greetings Corp., which attempted sales earlier this month amid a weaker market and had to pay hefty concessions to get the deals done.

“It’s been a food fight to get bonds,” Roberts said. “It’s refreshing to see.”

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