Money lent through the bond markets went overwhelmingly to lenderfriendly refinancing as dividend deals and leveraged buyout activity continued to be restrained. Supported by strong balance sheets and disciplined corporate management, US high yield defaults remained historically low at around 1%.
US and European high yield bonds and bank loans continued to move up positively in the second half of December – albeit on very little volume – as investors took a breather, satisfied by a year of strong, doubledigit high yield returns. As a result, high yield largely sidestepped the drama and late month volatility experienced by world equity markets as investors nervously watched US lawmakers careen toward the impending fiscal cliff – which they narrowly avoided plummeting off in the New Year, much to the relief of markets everywhere.
Combined loan and bond new issue activity ended the year at a record $668bn, dwarfing the previous 2007 combined record of $536bn, but, like the market, took something of a breather in the closing days of the month.
All considered, 2012 is likely to be remembered as offering investors in higheryielding credit a compelling mix of capital growth, yield and relative price stability. Borrowers and lenders alike found exactly what they were looking for without the market losing credit discipline.
What can 2013 do for us? From a fundamental perspective, the market appears as solidly attractive in 2013 as at any point last year. For example, less than $60bn in US high yield bonds and bank loans combined comes due in 2013. As a result, high yield spreads – designed to compensate investors for increased default risk – remain appealing even if the overall yield environment remains low.
While we do not expect capital appreciation to lead the high yield markets in 2013, we believe that investors should continue to find the asset class’s balance of risk and reward particularly compelling. We would not rule out a shortlived market repricing in response to headline news outside the high yield markets – both US and European countries have postponed serious questions of dealing with government debt into 2013 – but we would anticipate such corrections to be shallow and shortlived buying opportunities.
