The first quarter of 2021 was the busiest ever for US junk sales.
Almost $150 billion in issuance hit the market, surpassing even the inflated totals from 2020, when borrowers rushed to take advantage of the Fed’s support for the US credit market amid the crisis.
The supply deluge hasn’t abated. As of Friday, issuance for April exceeded $39 billion (figure below), making this the busiest April in history. The old record, for those interested, was $38.8 billion in 2014.
April’s borrowing spree brings total high yield issuance for 2021 to $188 billion.
It’s conceivable that this month could break into the top six months ever for supply. As Bloomberg’s Gowri Gurumurthy noted Friday, “three of the first four months of this year are among the top 10.”
Investment grade returns were dented in Q1 amid the Treasury selloff and IG is still down some 3% for the year. Meanwhile, the junkiest of junk is up more than 4% (figure below).
Part of this is attributable to the hunt for yield engendered by central banks, and one shouldn’t underestimate the extent to which it becomes self-fulfilling. When corporates which would otherwise be in distress (either figuratively or literally) not only retain market access, but are in fact able to borrow in abundance for near record-low costs, it creates a kind of suspended animation dynamic — the credit cycle is effectively frozen in time.
This has been going on for years in one form or another. I can recall analyst notes from a half-decade ago discussing the extent to which the credit clock had “stopped.”
Moody’s this week reiterated the obvious — the Fed’s explicit backing for investment grade credit and fallen angels last year “spilled over into the high yield market.” “With banks set to begin loosening lending standards, it’s hard to see [junk yields] jumping,” the ratings agency went on to muse.
Writing early Friday, Bloomberg’s Gurumurthy noted that with spreads near pre-GFC tights, there may not be much room for further tightening, “but strong global growth and corporate earnings should prevent widening [and] low potential defaults may even fuel more issuance as troubled borrowers capitalize on robust demand and cheap” money.
It’s worth noting that high yield fund flows have been a bit choppy of late (figure below). On Lipper’s data, junk funds saw outflows of $1.32 billion last week.