The rally in leveraged finance markets is back on, as investors snap up junk bonds as quickly as they come to market.
LCD: - Price guidance for Iron Mountain’s [records-storage company] 12-year (non-call five) subordinated notes is 5.75-6%, and pricing is expected this afternoon via Morgan Stanley, J.P. Morgan, Bank of America, HSBC, RBS, Scotia, and Barclays, according to sources. The deal has been upsized by $50 million, to $1 billion.This firm is raising $1 billion of 12-year subordinated (B+/B1) money at under 6%. The firm is rated BB- and is on negative rating outlook. And there is no shortage of buyers for such bonds.
As another indication of an overheated market, shares outstanding of BlackRock's iShares iBoxx $ High Yield Corporate Bond Fund ETF (HYG) hit another record ($16 billion of AUM) as retail inflows accelerate.
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| HYG shares outstanding (source: Bloomberg) |
HY mutual fund flows have been strong this year as well. The year-to-date net investment in HY mutual funds far exceeds all of last year's inflows and is on target to hit an all-time record by year-end.
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| Source: JPMorgan |
That has driven HY bond yields down to their historical support level.
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| JPMorgan US HY Index yield (YTW) (source: Bloomberg) |
Such aggressive valuations and tremendous retail participation make this market a prime candidate for a correction. This demand is particularly surprising given the macro backdrop of slowing global demand (with renewed weakness in manufacturing - see below) and unresolved issues in the Eurozone.
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| JPM Global Manufacturing PMI (source: Markit) |
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