The insatiable hunger for high yield bonds has significantly changed the supply/demand dynamics of the market, shifting the balance of power towards issuers and issuing banks.
“For some time we have not been comfortable that we are getting enough premium for the types of issues in the market.”
Claire McGuckin
According to a Finnish proverb: “Only dead fish follow the flow.” Recent years have seen massive flows into high yield bond markets, which raises increasingly pressing questions about the life left in the opportunity set. Demand has been so strong, the balance of power to set prices and dictate terms has shifted against investors to the detriment of the whole market.
Over five, 10 and 15 years, the European high yield market has outperformed both the FTSE 100 and Euro STOXX total return indexes. The BofA Merrill Lynch European Currency High Yield (EUR Hedged) has returned 16.72% over five years, 9.77% over 10 years and 6.57% over 15 years, compared to 15.06%, 6.16% and 2.49% for the FTSE 100 over the same time periods, and 11%, 5.44% and 2.44% for the Euro Stoxx respectively.
According to Moody’s, 2013 saw record European high yield new issue volumes of $106bn raised by non-investment grade companies. Neuberger Berman’s lead European high yield portfolio manager, Andrew Wilmont reports: “European high yield has been growing incredibly fast since 2009 in terms of the amount of bonds outstanding and the number of issuers. There are now around 400 issuers and the market has grown between $40bn to $80bn annually for the last couple of years to over $400bn total market size.”
The main reason for this, he says, is financial disintermediation: “The loan market is increasingly regulated and banks are being pushed to take less risk and diversify their lending more broadly.”
The growth in supply is being dwarfed, however, by increased demand from the buy-side as the hunt for yield continues to drive increasing numbers of investors towards high yield bonds. This is particularly pertinent in Europe.
Figures from EPFR Global show net flows of $122bn in US and European high yield bond funds tracked by their database between January 2009 and early July 2014. Interest in the European market has seen particularly strong growth, with cumulative flows up nearly 140% since the start of 2012 to $22bn. While cumulative flows into US funds show a more meagre 30% growth over the same period, total flows have exceeded $57bn, pushing more of these funds towards the European market in their efforts to put capital to work.
Comments