High-yield sell-off seen overdone

Fri Aug 8, 2014 12:10pm EDT
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By Natalie Harrison

NEW YORK, Aug 8 (IFR) - The US high-yield market may have suffered its biggest outflows on record over the past week, but strategists, bankers and investors say the move is overdone and completely out of line with what is occurring in other fixed income markets.

The outflows, which reached US$7.1bn last week and US$12.604bn over the past month, according to Lipper data, have had a brutal impact on the market.

Banks have pulled deals for the first time in months, while those that have priced bonds have paid double-digit coupons. Spreads, meanwhile, have widened by 90bp, with the yield-to-worst on the Barclays high-yield index now at 5.73%.

Market players are now trying to figure out if there is worse to come or if more stable conditions will return.

Dislocation in the credit market - with relative calm in the investment-grade sector, and even European subordinated financial paper by comparison, despite the bailout of Portuguese bank BES - does not make sense, some say, if the culprits for the high-yield sell-off are geopolitical or rate rise fears.

"The high yield market experienced nothing more than a short-term correction and some profit-taking, and we wouldn't be surprised to see a fairly quick rebound," said Dan Doyle, a high-yield portfolio manager at Neuberger Berman.

"Why? Generally speaking, high yield performance is driven by defaults and economic growth. We're hard pressed to see a scenario where defaults significantly increase over the next 18-24 months."

Moody's expects defaults to remain in the 2% to 2.5% range over the next year.   Continued...