High-yield spreads have kicked off the New Year by widening and market participants are expressing concern the nearly two-and-a-half year Bull Run in junk bonds is coming to an end. Profit taking and a growing belief the Federal Reserve is now intent on hiking rates more aggressively to combat rising inflation are among the factors contributing to the concern on high-yield spreads.
Ming Shao, senior portfolio manager at DuPont Capital Management in Wilmington, Del., thinks mutual fund redemptions have been driving the recent spread widening. "Investors have been resetting their game plans and setting up new shorts. Some people have been trying to take profits," he stated.
Harry Resis, director of U.S. fixed-income at Henderson Global Investors in Chicago, believes investors are also waiting to see new issues priced successfully to be reassured. He added the delay and potential re-pricing of IntelSat's $2.5 billion new issue has caused market anxiety.
Another high-yield portfolio manager said weakness in January--traditionally a month of good returns--is especially worrisome. "The market feels weak. It's only the second time ...we've seen spread widening [in January] and people are getting scared," he stated.
The Merrill Lynch High Yield Master II index finished December at 310 basis points over Treasuries; it was at 325bps over as BW went to press, even as yields in other fixed-income markets have tightened this year. At the end of December, Triple-C credits were priced on average at the upper bound of historical ranges at 96, and fell to 94 points last week. Mid-week, the high-yield market had posted a total return decline of 0.44%.
Chris Garman, head of high-yield strategy at Merrill, explained the recent Federal Open Market Committee minutes indicated the Fed might be tightening in part to correct an imbalance in the credit cycle. "If the Fed is targeting leverage, it might be looking for the capital markets to cool off," he said.
Garman expects spread widening to continue in the short-term and volatility to pick up at the beginning of February when a lot of monetary policy data is released. The second half of this year will be a more challenging credit environment with wider spreads, he speculated.
