The high-yield market has nearly doubled over the past five years to US$1.3 trillion.
“Part of that is because prices were depressed five years ago,” says Nicholas Leach, vice-president of global fixed income, high yield at CIBC Asset Management. He is lead manager of the Renaissance High-Yield Bond Fund.
“But in addition, the new issue market has reached record levels of about $300 billion a year. And while 60% of the proceeds have been used to re-finance existing debt, a lot of companies have diversified their funding sources away from just bank loans. They’ve grown to the size where they can go to the high-yield market.”
Equity markets are also up 50% from two years ago. As a result, companies that previously had pension deficits are now posting surpluses. That’s also due to the rise in treasury rates.
“Once the credit rating agencies start to acknowledge that, we could see some upgrades, just because of the improvement in those off-balance-sheet obligations,” says Leach.
And, the default rate was below 1% in 2013, and will likely stay below average for the next three or four years.
Finally, interest coverage ratios are strong, as is primary-market issuance, leading to strong credit quality. “Many companies have refinanced high-coupon bonds with low-coupon bonds, and they’ve also extended the maturities,” says Leach.