Guest post by Alhambra Investment Partners.
It's Not A Stock Bubble But A Bigger Corporate Bubble
With liquidity running somewhat perilously noncommittal since June, you would think the riskiest parts of the credit market would be most affected. That is incorrect and once again stands out as to the bubbly nature of the current age. Aside from liquidity draining enthusiasm into and around October 15 and December 1, high yield debt has not only repriced itself back toward its prior levels but has also seen increasing exuberance in terms of volume.
The effects of the October 15 liquidity event remain as a reminder about volatility, but the dent itself has not yet appeared permanent or even durable. Starting with leveraged loan prices, the recent “pause” in “dollar” disruption has meant not just sideways trading in this highest of risk tiers but an actual retracement to a significant degree.
As of early March, the index price of these leveraged loan tranches is about halfway back to the July peak and already a bit above the October 15 decline. That apparent fervor for the riskiest offerings is almost universal, as high yield bonds have been reborn so far in 2015.
Again, where liquidity had a direct impact on issuance in late 2014, likely through pricing, that has disappeared come 2015. As if to emphasize that further, Actavis PLC (ACT) sold $21 billion in high yield bonds today at stunningly low yields. Almost the entire issue was rate BBB- junk, but it priced at just 175 bps above the benchmark UST. Not only was that incredibly low in historical context, it was actually quite a bit below even recent trading and indicating that there is still intense “demand” for any corporate paper of any size.
The Actavis sale is the latest sign of a booming market for new bond issues. Underscoring that point, Exxon Mobil Corp. (XOM) announced plans to sell $7 billion in new bonds on Tuesday morning.
A 10-year Actavis bond was priced to yield 3.843%, or 1.75 percentage points more than benchmark U.S. Treasury. That is on the lower end of guidance released earlier Tuesday and lower than the yields suggested on Monday.
