With the Fed still coy on when it will lower rates, high-yield issuers — many of which face increasingly urgent refinancing needs — continue to step briskly from the sidelines in the first quarter, as borrowing costs trend lower through fluctuating Treasury yields. February ended with $26.5 billion in new-issue bond volume after $31.1 billion cleared the primary market in January, LCD data shows.
After 10 more issuers announced deals this week, high-yield issuance of $63 billion as of March 6 marks the third fastest year-to-date start on record, trailing only the totals in 2020 ($68 billion) and 2021 ($77 billion). Deals cleared the market during 81% of January’s business days and 85% of February’s, both reflecting the steadiest cadence of issuance since 2021, when issuers swarmed the marketplace to lock in historically low funding costs.
However, overall leveraged finance activity slowed from January’s torrid start, as leveraged loan volume fell off more than $30 billion month to month, to $35.1 billion in February.
Motivations were clear for issuers tapping the bond markets. Refinancing needs drove 85% of February’s high-yield bond placements, up from 75% in January. For the quarter to date, the 79% share for refi-driven deals is neck-and-neck with Q4 2023, rivaling the pandemic-era peaks of 81% in Q3 2020 and 78% in Q1 2021.
Deals backing recapitalizations remained visible at 8%, while M&A/LBO issuance slipped to a slim 7% share.
The cost to issue fresh paper hit a 19-month low in February, even after a sharp rise in Treasury rates. (The 10-year Treasury yield moved from 3.82% on Feb. 1 to 4.35% on Feb. 22.) Issuers cleared new high-yield paper — secured and unsecured — at an average yield of 7.58% in February, which was down more than two points from 9.94% in October 2023.
That drop was most pronounced for senior unsecured notes, which have come back into favor since the Fed’s dovish-leaning November meeting. On average, senior notes cleared the market at a 17-month low at 7.46%, or T+335. Both metrics tightened nearly a full point from January’s close. Secured bond costs dropped to 7.72% (T+344), from 7.81% (T+384) one month prior.
Notably, unsecured issuance of $26.3 billion through February this year more than tripled from $8 billion for the first two months last year. Secured issuance increased 22%, to $31.3 billion.
Sliding costs are emboldening issuers to stretch their funding horizons as well, after they hugged the shorter end of the curve through the Fed’s rate-tightening arc. The share of deals with maturities of five years or less slid to 32% in February, from 44% a year earlier, while the share of deals dated 6-8 years jumped up 15 points, to 65%. Additionally, the first 10-year paper since December surfaced via a $1 billion issue of 6.375% senior notes for Builders FirstSource.
Issuers of double-B and BB/B rated bonds — many of which held to the sidelines last year to wait out better funding conditions — printed those higher-rated bonds in force in February, accounting for 69% of issuance, in a sharp rise from 45% in February 2023. Single-B issuance tumbled to 24%, from 43%, while triple-C issues continued to edge back into the marketplace, accounting for 6% of February volume.
Abetted by firm spread progressions in the early sessions of the month, the asset class again notched a slim gain in February, returning positive 0.10% for the month, per the S&P US High Yield Corporate Bond Index. This marked the fourth consecutive month of positive performance for the index, and it built on returns of 0.19% in January, 3.58% in December, and November’s rally-driven 4.64% gain. High-yield bonds underperformed a 0.9% return for leveraged loans in February (per the Morningstar LSTA US Leveraged Loan Index) and a 5.3% return for the S&P 500, while outperforming against losses for investment-grade bonds and intermediate Treasuries for the month.
However, an extended rally in risk sentiment finally lost steam at the end of the month, as rates bobbled on higher-for-longer Fed rhetoric, and as issuance totals mounted. The marketplace witnessed the first weekly outflow for high-yield retail funds since the Nov. 1 FOMC meeting, with investors pulling a net $540 million for the week to Feb. 28, ending the longest string of uninterrupted inflows since 2012, per Morningstar. The funds have since attracted inflows of $1.17 billion for the week to March 6.
As well, secondary market conditions buckled a bit at month’s end after spreads touched new multi-year lows. The average bid for LCD’s 15-bond sample of liquid high-yield issues slipped 86 bps at the Feb. 29 reading, to 90.68% of par (7.44%), from 91.54 (7.22%) on Feb. 1. The bid has since risen to a five-week high of 91.15 as of March 7.
The sample’s T+298 option-adjusted spread on Feb. 29 was up from T+290 a week before, a low since late 2021. However, month-end spreads still reflected strong trailing gains, versus readings at T+317 on Feb. 1, T+408 at the highs in October 2023, and T+482 at the height of the March 2023 banking crisis.
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