Record High Yield Issuance and Spread Floors

$1.3 billion a day tops the previous record of $1.2 billion a day. No, not some form of government spending, but instead the level of issuance in the high yield bond market. May is going to set a record of almost $42 billion, which tops the prior record of $39.6 billion set in March 2010. Despite the record level of issuance, spreads have only briefly dipped below the 400 bp level in the past six months and have tended to remain around the mid to high 400 bp area. The historically high level of new issuance seen in May should be pushing down spreads if it were not also for the record low yields on Treasuries.

Since the Fed continues to favor a record low level of rates, the corporate high yield market is running into a yield floor. If spreads were to decline closer to historical levels of 250-350 bp (based off the CDX High Yield Generic 5 Year), that would indicate an average yield today of 4.20 – 5.20%, which is not a level most investors would find exciting for a high yield issuer. The result: spreads are likely going to remain elevated despite a record level of issuance in the high yield market.

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