Bangkok--13 Jul--Standard & Poor's
The high-yield market continued to roll in June, said an article published today by Standard & Poor's. Speculative-grade spreads tightened 88 basis points (bps), and the primary market was active, with $15.5 billion in new issuance hitting the market during the month.
While the improvement in the high-yield market has been steady, we expect investors will be looking for better results in economic data and positive signals in second-quarter earnings announcements for significant spread improvement to continue, according to the article, titled "U.S. High-Yield Prospects: Market Rally Could Take A Summer Vacation (Premium)."
The risk premium in the high-yield market has contracted at an unprecedented rate over the past six months. The spread on the Standard & Poor's speculative-grade composite fell to 971 bps on July 1 from 1,647 bps at the end of 2008.
"The improvement in spreads reflects a significant decline in both credit and liquidity risk. For one, the market has attached a lower probability to an apocalyptic default scenario, bringing the default premium more in line with realistic expectations," said Diane Vazza, head of Standard & Poor's Global Fixed Income Research Group. "Also, as some liquidity has crept back into the secondary market, the liquidity premium built into bond yields has declined drastically."
Now that spreads have tightened 783 bps from their peak on Dec. 18, 2008, the outlook for high-yield spreads over the next couple quarters becomes a bit more opaque. Although the pace of credit deterioration has slowed, as seen by the decline in the absolute number of downgrades over the past few months, the near-term outlook is still negative.
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