The issuance drought in the beginning of the year coincided with funds flowing out of the asset class and bond yields spiking, which put off many companies from issuing bonds, says Marsh. “Leaseplan [a Dutch car lease company] is an excellent example of this. They tried to issue €1.55bn in bonds in February, but were deterred by the high coupon they had to pay,” he explains. “They then postponed the issuance to March, when conditions were more favourable.”
‘Default rate drives volatility’
Patrick Flynn, a US high yield bond portfolio manager at Neuberger Berman, acknowledges that volatility is now higher than before, and retail investors are capricious. “We have seen some flows in and out recently. These flows are important for the short-term technicals in the market, but one should remember that the amount of coupons the market throws off each year, 75% of which are reinvested, far outweighs the effects of outflows,” he says.
According to Flynn, the increased volatility in high-yield bonds has more to do with a spike in defaults. “From 2010 to 2014, the default rate was 1%, and this has now spiked to 3.5%,” he says. “The increase in defaults in the energy sector prompted fears in the beginning of the year that defaults would spread, so volatility increased.”
Flynn also dismisses the dominant narrative of decreasing liquidity in the high yield market, saying the volume of bonds traded almost doubled from 2011 to 2015. “And so far this year, $13bn a day has been traded. This is more than during the same period in 2015.”
