God knows I’ve been a persistent critic of HY credit for the better part of … well… for the better part of “a long ass time.”
And I’ve been wrong. Really wrong. So wrong in fact, that if you’d bought junk bond ETFs at last year’s deflationary nadir, you’d be up something like 16% at this point.
The premise behind the rally is pretty much just: “oil.” Which is ironic, because when everything was in shambles late last January, the premise behind the slump was also just: “oil.”
Well I don’t know if you’ve noticed, but not a whole lot has actually changed with regard to the fundamentals in the crude market. Of course they’ll be geopolitical tension that will occasionally cause supply jitters (like Wednesday’s Iran missile launch drama), but generally speaking the story boils down to the fact that any increase in prices will be met with an immediate increase in supply from the US and that means supply cuts from OPEC and non-OPEC producers are largely meaningless.
I mean just look at these numbers (out from the EIA earlier today):
- EIA: Crude +6,466k Bbl, Median Est. +3,000k Bbl
- Gasoline +3,866k vs est. +1,500k
- PADD 1B gasoline +3,047k
- Distillates +1,568k vs est. -500k
- PADD 1 Distillates -436k
- EIA Stocks Surge Shows OPEC Still Faces Battle to Balance Market
- Big increases in U.S. crude and major products inventories show that OPEC output reductions are still far from bringing market back into balance, even as producers implement cuts more effectively than many believed possible.
- U.S. nationwide crude inventories rose most since October, increasing for 6th week out of 7 to 494.8m bbl
- Gasoline stockpiles up 3.87m bbl, taking build since Christmas to 30m bbl, or 13%, as 4-week average demand falls to an almost 5-year low
- Distillate inventories climbed to 6-year high of 170.7m bbl
- Nationwide gasoline stockpiles rose to 2nd-highest level in 27 years of weekly EIA data
And yet the Iran story takes precedence:
Obviously the plunge in the dollar following the Fed statement gave crude a boost too, but the point is, read those bullets (above) and tell me how in the world crude didn’t plunge on Wednesday. Or, put another way…
It’s like it hasn’t even occurred to anyone that the second order effects of an Iranian missile launch could well be bearish for crude. If Tehran decides to fan the sectarian flames even further (we’ve already got three Sunni/Shiite proxy wars raging), you can bet one way Riyadh will look to punish the Iranians is by ramping up production and driving down prices. Remember, the Saudis can fund their budget deficit with debt.
Anyway, back to HY. If – or more likely “when” – crude prices plunge again, it’s going to be right back to where we were this time last year: pricing in Armageddon…
And don’t forget, now we’ve got HY retail to worry about as well. Something like 75% of CCC issuers in the space have been locked out of debt markets for quite a while and if we get a border tax you can just kiss the sector goodbye. Oh, and the space that would be hurt the most from eliminating the deductibility of interest expense (after taking into account the offsetting benefit of capex depreciation) is none other than HY retail.
So with that as the backdrop, sit back and read the following summary of how January went for HY issuers and HY in general. Basically, this is a summary of how stupid people are. Enjoy.
U.S. High Yield Issuance Surged in January; CCCs Beat Stocks
Issuance in January rose more than 3-fold from a year ago, with 37 deals for $19.01b pricing, making it the busiest month since September; January 2016 priced $5.5b.
- Primary kept a steady momentum during the month as yields dropped to a 27-mo. low of 5.81%, spreads reached multi-year tights and stocks set a new high with the DJIA crossing the 20,000 mark
- CCCs beat BBs and single-Bs for the 11th consecutive month with 2.5% returns vs 1.10% for BBs and 1.39% for single-Bs
- High yield sentiment was upbeat amid steady oil, net inflows into retail funds and optimism that a Republican-controlled Congress would loosen regulations and cut taxes
- High yield posted returns of 1.45% for January
- Lipper estimates an inflow of $845m WTD, as flows rebound from last week
- Retail funds reported an outflow of $532m for week ended Jan. 25 after seeing an outflow of $887m for week ended Jan. 18
- Reported an annual inflow of $9.6b in 2016 for the first yearly inflows since 2012, after losing $45b combined in 2013, 2014 and 2015
- Primary was a potpourri comprised of BB, single-B and CCC credits with proceeds to fund LBOs, M&As and plain old refinancing
- Single-Bs comprised 50% of volume at $9.4b
- CCCs comprised one-third of issuance with 14 deals for $6.305b
- BBs accounted for 17% at $3.295b
- 39% of total volume, $7.375b, funded LBOs and M&A combined, led by Park Aerospace’s $3b 2-part offering
- Refinancing and/or repaying debt comprised 61% of issuance
- 144a for life deals continued to dominate issuance with $13.84b, or 73% of total volume
- Bloomberg Barclays High Yield Index spreads tightened 21bps for January and closed at +388 yesterday, hitting a 27-mo. low of +380 last week
- YTW dropped 27bps and closed at 5.85%, reaching a 27-mo. low of 5.81% early January
- BBs spreads tightened 8bps and closed at +262, but hit a 2-mo. low of +251 in early January
- YTW dropped 12bps to close at 4.58%, touching a 3-mo. low of 4.47% earlier last month
- Single-Bs spreads tightened 18bps to close at +364, hitting a 30-mo. low of +355 last week
- YTW dropped 22bps to close at 5.64%, reaching a 27-mo. low of 5.57% early last month
- CCCs spreads tightened 71bps to close at +736, hitting a 2-yr low of +730 last week
- YTW plunged 83bps to close at 9.28%, touching an 18-mo. low of 9.25% last week
- BofAML High Yield Index spreads tightened 28bps and closed at a 27-mo. low of +393
- YTW dropped 21bps to close at 5.92%, reaching a 20-mo. low of 5.86% last week
- BB spreads narrowed 7bps and closed at +264, touching a 27-mo. low +252 last week
- Single-B tightened 21bps to close at +389, hitting a 2- yr low of +380 last week
- CCC spreads tightened 89bps to close at +882, tightest since 2013