Photographer: Scott Eells/Bloomberg

Last Year Was a Big One for the Corporate Bond Market

Lots of new records made.

A big one, but not necessarily a good one.

Goldman Sachs analysts led by Lotfi Karoui highlighted 15 records broken by the corporate bond market in 2015, though not all of them were necessarily positive.

For a start, high-yield bonds sold by companies with more fragile balance sheets recorded their worst annual returns in a year not marked by a U.S. recession in a decade, with a fall of 4.7 percent.

Source: Goldman Sachs

The good news for investors seeking higher returns is they can now have their pick in the high-yield space. About 9 percent of the high-yield market now boasts yields above 20 percent—the highest amount since the financial crisis.

Source: Goldman Sachs

To that point, the dispersion, or difference, in spreads on high-yield bonds has also reached a postcrisis record as investors began to differentiate between the junkiest of junk bonds (CCC-rated) and the, erm, less junky.

Source: Goldman Sachs

The amount of investment-grade bonds that were sold soared to an “unprecedented” $1.3 trillion, Goldman said. The number of individual deals, however, was the lowest in more than a decade, illustrating the preponderance of mega M&A-driven deals in the market.

IG supply
Source: Goldman Sachs

Another bond market oddity arrived in the form of a greater difference between the performance of the cash credit market and credit derivatives, with the Markit CDX High-Yield Index finishing up on the year while the underlying cash market finished down. “The regulatory and liquidity environment today have made a long position in cash (that requires balance sheet) vs. synthetics (that does not) more onerous to execute,” according to the Goldman analysts, picking up a previously discussed theme.

Source: Goldman Sachs

Finally, and potentially fueling regulatory concerns following the closure of the Third Avenue credit-focused fund, a record share of the corporate bond market is owned by mutual funds and exchange-traded funds. Together the two fund vehicles now own 25 percent of the market, with ETFs by far the minority at an estimated 3 percent. “While the high-yield and investment-grade market has withstood significant mutual fund outflows (in 2014 for HY and in 2015 for IG) without directly causing sustained spread dislocation, redemption risk in the new bond architecture remains to be tested,” the analysts said.

Source: Goldman Sachs

Other records broken in 2015 include the highest volatility in money flowing in and out of high-yield bond ETFs, the largest outflows from investment-grade mutual funds on record, plus a dwindling supply of CCC-rated debt. “The dearth of CCC supply appears to be pricing in a recessionary-type environment, despite our view that the probability of a U.S. recession is quite low,” the Goldman analysts said.

Let’s see what 2016 brings.