High-yield bond returns reach five-year peak

High-yield bonds had their best monthly returns for five years in April as institutional investors have come back into the asset class and the leveraged load backlog has reduced.

Wesley Sparks, portfolio manager at the Schroder ISF global high yield fund run by Schroder Investment Management, said April’s total return of +4.2% on the Lehman Brothers global high-yield corporate index, made it the best month for returns in five years.

The rally in high-yield credit over the past seven weeks has been broad-based with airlines the only industry to post a negative total return in April of -0.5%, according to Sparks.

The big outperforming sectors last month were autos (+8.3%), finance companies (+7.5%), cable (+6.9%), technology (+6.8%), and entertainment (+6.1%).

He said the net supply-demand balance has improved markedly over the past month as large banks and dealers have been able to get approximately $30bn (€19.4bn) in leveraged loans off their balance sheets by selling blocks of loans at discounts to private equity firms and other institutional investors, to reduce the loan backlog to $90bn.

Citigroup, for example, offered a consortium of private equity firms $9bn of debt to remove $12bn of leveraged loans from its balance sheet at a loss. Apollo Management, Blackstone Group and TPG Capital are understood to have bought the loans at a 10% discount to par value.

Deutsche also reportedly sold approximately $5bn of its leveraged loans to private equity firms.

Sparks said: “Meanwhile, demand has risen profoundly in the past month: asset allocators and other institutional investors have come back into the asset class, and the net inflows into high-yield mutual funds have exceeded $1.7bn over the past five weeks and is the biggest wave of inflows since late 2003, as tracked by AMG.”

Corporate high-yield bond issuance so far this year is $39.8bn, 65% lower than in the same period last year, according toDealogic, the investment banking research provider.