Red-Hot High-Yield Bond Market Showing Signs of Restraint and Exuberance
The U.S. high-yield (HY) bond market has come roaring back to life in 2020 after several years of playing second fiddle to the leveraged loan market. HY bond issuance exploded to more than $200 billion in 1H20, including $128 billion in 2Q20, on track for its best year ever.
The same can’t be said for leveraged loans, where syndication volumes in 2Q20 were down significantly from a year ago as new deal flow dried up. The divergence between these two credit markets has been hard to miss. New HY bond issuance in 2020 has provided crucial financial lifelines to many large businesses suddenly caught in the crosshairs of COVID-19.
Paving the way for this comeback, just as COVID-19 was beginning to wreak havoc on credit markets, was the late March announcement by the Federal Reserve Board of its Primary Market Corporate Credit Facility and Secondary Market Corporate Credit Facility, two programs which potentially represent up to $750 billion of purchases of new or existing bonds, including “fallen angel” corporate debt and high-yield exchange-traded funds (ETFs).1
The mere announcement of these programs restored confidence for sputtering corporate credit markets and ushered in a surge of new corporate debt issuance, including junk bonds, to raise liquidity needed to withstand the pandemic’s impact.
Ironically (and surprisingly), the Fed has barely tapped these two programs to date, with just $13 billion of HY bond and ETF purchases through August. Nonetheless, its commitment to support corporate credit markets should they seize up has been good enough for credit investors who continue to believe that the Fed has their back.