Festival Celebrations and Rate Hike Led to Low Junk Bond Issuance
Investor flows in high yield bond funds
Investor flows in high yield bond funds were negative in December. According to Lipper, net outflows from high yield bond funds totaled $8.0 billion in December. This was higher than net outflows of $1.7 billion in November. With this outflow, high yield bond funds have witnessed outflows to the tune of $7.1 billion in 2015.
Yields and spreads analysis
Yields on high yield debt and spreads between high yield debt and Treasuries both rose in December from a month before. High yield debt yields, as represented by the BofA Merrill Lynch US High Yield Master II Effective Yield, rose sharply by 63 basis points to 8.8% on December 31, 2015.
Like yields, the OAS (option-adjusted spread) rose month-over-month. The BofA Merrill Lynch US High Yield Master II OAS rose 55 basis points to end around 7.0% on December 31 from a month before.
Returns on high yield debt indexes and MFs
Bond yields and prices move in opposite directions. With yields rising, returns on high yield debt fell from November 30 to December 31. The BofA Merrill Lynch US High Yield Master II Index fell 2.6% over the month. Returns in 2015 remained negative, with the index falling by 4.7% from a year ago.
Mutual funds such as the American Funds American High-Income Trust (AHITX) and the PIMCO High Yield Fund (PHDAX) provide exposure to high yield debt. The AHITX fell by 3.5% while the return of the PHDAX fell 4.7% from November 30 to December 31.
The holdings of the AHITX include bonds of Sprint (S) and Wind Acquisition Finance SA while the holdings of the PHDAX include bonds of Citigroup (C), Altice SA, and AerCap Ireland Capital Limited. The latter is a wholly owned subsidiary of AerCap Holdings NV (AER).
Junk bond issuance in the primary market froze for three successive weeks in December due to the holiday season and as the rate hike made issuers step back. In December, Mednax (MD), HCA Holdings (HCA), Aramark Services, an indirect wholly-owned subsidiary of Aramark (ARMK), as well as Clear Channel International B.V., an indirect wholly-owned subsidiary of Clear Channel Outdoor Holdings (CCO), were some of the issuers of junk bonds.
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