As Treasury yields surge, high-yield maturities shorten

Fri Feb 8, 2013 12:20pm EST
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By Joy Ferguson

Feb 8 (IFR) - The recent rise in Treasury yields has led to a surge of interest in shorter-dated debt in the high-yield market, as investors look to protect themselves from duration risk.

In the past couple of weeks, a variety of issuers have responded by pricing five- or six-year bonds with call dates of around two years or three years, at which point the company is allowed to redeem the bonds at a specified call price.

These shorter-maturity notes compare with the more typical high-yield maturities of eight-year non-call four, or 10-year non-call five.

"Issuers are playing to the appetite of the market, and that is not for longer-dated fixed income securities at these extremely low yields," said Dan Heckman, senior fixed income strategist at US Bank Wealth Management.

The average yield-to-worst hit 5.61%, its lowest point ever, on January 24, but has since widened to 6.01% as the market has reacted to rising Treasury yields.

Buy-side participants have been refocusing their strategy in both the secondary and primary markets to adapt to the changing climate.

"Investors need to be careful and dance around the higher risk areas of the market from a credit and duration perspective," said Heckman.

"It doesn't take much of an uptick in default rates for high-yield to be affected. It's a very touchy time in the bond market. We would be shortening duration here and taking a little bit of a breather until we see a better buying opportunity."   Continued...