Why are high-yield bonds so volatile?

Added 7th July 2016

High-yield bond volatility has increased markedly over the past two years, which is partly a reflection of mounting macroeconomic uncertainty. But the unprecedented pace at which money is flowing in and out of the asset class suggests there is something more to it.

Why are high-yield bonds so volatile?

In the current environment, where decent yields are hard to come by, high-yield bonds enjoy a natural degree of attraction with investors. Consequently, they have been the most popular fixed income asset class with European fund buyers over the past couple of years.

However, these same fund buyers have been ambivalent in their support for high yield bonds, alternating quickly between bouts of buying and selling.

While part of the explanation for this is in macroeconomic issues, such as the collapse of the oil price affecting US high yield energy issuers, there is more to it. Lack of liquidity, as banks have retreated from the market, is often singled out as the major source of volatility. But is this right?

It’s all about issuance

“It’s true that banks don’t hold the same amount of stock on their balance sheets as a few years ago, but one has to appreciate that liquidity is a function of secondary market trading, which in turn is heavily influenced by new bond issuance,” says Stephen Marsh, a portfolio manager at T. Rowe Price’s European high yield bond team.

And it’s precisely this new issuance that is more volatile than ever before. According to BofA ML data, issuance came almost to a standstill in the beginning of the year, with just €1.6bn in new deals in January and February combined. April, by contrast, saw a multi-year monthly high in new issuance of €15.2bn. The out- and inflows from investors only serve to exacerbate volatility.

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About Author

Tjibbe Hoekstra

Senior Reporter

Tjibbe joined Expert Investor as a senior reporter in March 2014. Before moving to London he worked as a financial news reporter for various news outlets in Amsterdam, including Reuters and ANP, the main news agency in the Netherlands. He also worked for Fondsnieuws, a website and magazine for finance professionals in the Netherlands. Tjibbe holds a MSc in Public Administration and a post-graduate diploma in Journalism.



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