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Amid New-Issue Drought, US High Yield Market Shrinks for 3rd Straight Year

In a little-heralded yet noteworthy development, the amount of outstanding U.S. high-yield debt declined for an unprecedented third year in a row in 2018. The face value of the ICE BofAML U.S. High Yield Index finished the year at $1.231 trillion. That was down from $1.283 trillion on Dec. 31, 2017. The 2018 year-end figure was 8.2% below the all-time year-end peak of $1.341 trillion in 2015.

Several forces drive year-to-year changes in the amount of outstanding high-yield debt.

These include both additions, i.e., new issuance (net of bond refinancing) and downgrades from investment-grade (“fallen angels”), and subtractions, i.e., maturing issues, partial redemptions, defaults, and upgrades to investment grade*.

An important factor in the most recent shrinkage was a decline in new issuance, due in substantial part to the diversion of primary activity to the leveraged loan market. At $169 billion, U.S. high-yield volume was the lowest full-year figure since 2009, according to LCD. The peak of $345 billion was recorded way back in 2012. – Martin Fridson

* Bonds are removed from the index depicted in the chart when their remaining life shortens to less than one year. Defaulted issues remain speculative-grade (D by S&P Global Ratings) but exit the index by virtue of turning from high-yield to no-yield bonds.

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