Saturday, July 21, 2012

Lack of product, cash on the sidelines, and low rates, all driving HY valuations to new highs

What's creating the frothy market that allows companies that normally would turn to VC funding to use HY debt markets instead? The answer turns out to be lack of product, rising cash on the sidelines, and low rates combined with demand for income.

As discussed earlier, based on JPMorgan's analysis there is simply not enough net new issuance to meet the demand. The chart below shows that year-to-date high yield and institutional leveraged loan issuance has been below last year's volume.

Source: LCD

And cash allocated to the HY asset class is accumulating - in search for new product.
Source: Credit Suisse
CS: - After a quiet few months of issuance combined with additional retail demand, we believe the proverbial cash-on-the sidelines is sitting at one-year highs and creates a very positive tailwind in the HY asset class buffering it from a negative macro backdrop.
In another sign of strong demand, shares outstanding of BlackRock's iShares iBoxx $ High Yield Corporate Bond Fund ETF (HYG) resumed their climb, hitting another record. HYG assets are now close to $15bn as retail cash pours in.

HYG shares outstanding

Extraordinarily low interest rates and the need for income are also contributing to this demand.
JPMorgan: - With the recent drop in high-yield bond [yields] (7.28%) and loan yields (6.55%) to fresh 2-month lows and high-grade bond yields also falling further this week to record lows (3.67%), the performance of credit highlights investors’ affinity for income and stability as a highly uncertain global economic landscape continues to develop.
These factors are driving the HY bond valuations to new highs, allowing companies to obtain ridiculously cheap financing. And corporations are jumping in to grab this funding while the going is good.

JPMorgan HY Total Return Index
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