Global High Yield bond issuance from January 1st through May 23rd is at a 13-year low as investors have less appetite for risk in the absence of the Fed put.
Global High Yield bond issuance totalled $90 billion between January 1st and May 23 of this year. This is the lowest issuance level during that period over the past 13 years. Only the financial crisis of 2008-2009 saw lower issuance levels. U.S. High Yield issuers have raised $50 billion YTD, down 78% year-over-year.
High Yield bond investors are primarily concerned with a given issuer’s cash flows, especially in the absence of QE. High Yield bond investing is poised for a return to the pre-QE days when the Fed was not actively participating in the markets. For investors who were not around in 2008, the Fed’s foray into the markets as an active participant was a first and dealt a severe blow to Capitalism. That initial QE period of 2009 marked the beginning of the Fed’s activism which has continued through present day. While the Fed has paused QE, we fully expect the Fed to return to its QE ways. Our preference would be for the Fed to leave the Fed Funds Rate alone (allow the market to set short and long rates), and instead focus on shrinking the money supply by reducing the holdings on its Balance Sheet.
It will be fascinating to observe the number of ratings downgrades from Investment Grade to High Yield (“fallen angles”), in the coming months. Surely this will be one of the metrics the Fed will observe as it tightens, as will the number of defaults.