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It looked, for a moment there, like the post-crisis junk bond party was finally winding down. Sophisticated investors were paring back holdings and short interest on junk bond exchange-traded funds had jumped.
Then CNH Capital showed up, and the music cranked up again. The financing arm of CNH Global, a maker of agricultural and construction equipment, is paying just 3.625 per cent on the $600-million (U.S.) of five-year junk bonds it sold just last week. That ties for the lowest ever coupon for that maturity, according to Dealogic. Investors guzzled the bonds down. The deal was increased in size by $100-million to meet demand.
Notice, however, the five-year tenure on CNH's deal. There is particular demand for junk bonds with shorter maturities – investors clearly expect central banks to stay dovish in the near term. And CNH Capital is rated at the high end of the junk spectrum.
Bond prices remain elevated, despite muted flows into junk bond funds, because supply is weak, too. There have been less than $1-billion of net inflows into junk bond mutual and exchange-traded funds this year, compared with $21-billion in the same period a year ago, Lipper data show. But more than two-thirds of junk issuance in 2012 has gone to refinancing. And beyond a few blockbuster deals (Dell, Heinz and Virgin Media), the bond-printing mergers and acquisitions market has been anemic.
Junk bonds returned nearly 3 per cent in the first quarter and at 5.6 per cent, their average yield is near all-time lows, according to Barclays. Revellers point out that while yields are at their lows, spreads aren't. Those levels are at 466 basis points versus 233 basis points in 2007. But that is cold comfort when the benchmark is artificially depressed U.S. Treasuries. For now the party continues; but don't hang around until the cops show up and the music is turned off.