(Bloomberg) – Corporate bonds had a big year in 2015, but it was not necessarily a good one.
Goldman Sachs analysts led by Lotfi Karoui highlight 15 records broken by the corporate bond market last year, including many that left many advisors and investors unhappy.
For example, high-yield bonds sold by companies with more fragile balance sheets recorded their worst annual returns in a decade for a year not marked by a U.S. recession, with a fall of 4.7%.
More positively, for advisors and investors seeking higher returns, is that they can now have their pick in the high-yield space. About 9% of the high-yield market now boasts yields above 20% — the highest amount since the financial crisis.
To that point, the dispersion, or difference, in spreads on high-yield bonds has also reached a post-crisis record as investors began to differentiate between the junkiest of junk bonds (CCC-rated) and those less so.
The amount of investment-grade bonds sold soared to an "unprecedented" $1.3 trillion, Goldman said. However, the number of individual deals was the lowest in over a decade, illustrating the preponderance of mega M&A-driven deals in the market.
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.
More notably, and potentially fueling regulatory concerns following the closure of the Third Avenue credit-focused fund, is record mutual fund and ETF ownership of corporate bond market. Together the two fund vehicles now own 25% of the market, although ETFs comprise just 3% of that. "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.
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.
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