Boosted by Federal Reserve initiatives to prop up the asset class, raging risk-on sentiment, and tightening yields and spreads, U.S. high-yield bond issuance closed out May with $43.8 billion in activity, the largest on record for that month, according to LCD. The figure edges out the previous $43.5 billion peak from May 2013.
The last month with more volume was September 2013, at $47.7 billion. Year-to-date volume through May is $152.9 billion, with 28% of that figure placed over the four full weeks of last month. The issuance tally for the current year marks a 48% increase from the first five months of 2019.
The steady stream of supply, split across 72 tranches, was capped by WESCO International Inc.'s two-part, $2.825 billion of M&A paper, which priced on May 29. The offering, along with deals last month for INTL FCStone Inc. and BMC Software Inc. diversified the landscape of high-yield sales for May, which was dominated by refinancing transactions, and debt supporting general corporate purposes, as companies take advantage of lower benchmark yields to shore up balance sheets amid murky forward outlooks in the shadow of the global pandemic.
May's blockbuster volume follows the dry spell of supply in March, triggered by coronavirus-induced market volatility, and extends the primary market revival in April. The Fed helped trigger the move off of the sidelines with its April 9 announcement that it would expand its corporate liquidity facilities to coronavirus-era fallen-angel credits. While the program provided explicit support for only pockets of the HY issuer universe, it signaled to borrowers and investors that the Fed would undertake extraordinary measures to foster capital-market access for liquidity-strapped borrowers.
Indeed, U.S. Treasury Secretary Steven Mnuchin, in recent congressional testimony, boasted that the corporate bond facilities had “unlocked the entire primary and secondary market for corporate bonds,” even before directly extending any taxpayer money.
Since launching the facilities, inflows into U.S. high-yield funds have posted record-breaking volumes. The asset class has seen nine consecutive weeks of inflows through May 27, according to weekly Lipper reporters.
Firming market conditions has also been a boon for speculative-grade credits. Last month, borrowing costs dipped to under 7% for the first time since early March, with the average yield to worst for bonds in the S&P U.S. Issued High Yield Corporate Bond Index at 6.87% on May 28. Additionally, the average option-adjusted spread for the index tightened to T+599, from levels indicative of distressed debt months earlier.
High-yield bond volume has also been bolstered by slowed supply in the leveraged loan market. Through May 28, institutional loan volume in 2020 was $107.9 billion, down 10% year over year, according to LCD.
This article was written by Jakema Lewis and John Atkins, who cover the bond market for LCD.
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