Yield-hungry investors were left disappointed on Thursday after the European high-yield bond market refused to budge from its tight levels despite the US Federal Reserve's shift to hawkishness. The US central bank on Wednesday signalled that it would be accelerating the timeline for interest rate increases, with Fed Chair Jerome Powell saying that discussions had already begun on how to end the bank's US$120bn of monthly bond purchases. "In general, I think people view inflation as a bigger storyline in the US than in Europe, but secondary is softer today [and] late yesterday than in the previous sessions," said a senior leveraged finance banker. "The newest issues should be fine though – euro high-yield should not be so sensitive that brand new issues suffer much for a late 2023 hiking timeline." The 10-year US Treasury opened on Wednesday bid just under 1.50% but climbed as high as 1.59% on Thursday, before dropping back to 1.57%. Nomad Foods' €750m 2.5% June 2028s briefly dipped on opening on Thursday morning to 99.80–100 after pricing at par the previous day. The move was only a temporary wobble, however – the bonds were later seen bid above par at 100.10. Meanwhile, Antolin's €390m 3.5% April 2028s were seen bid at 100.10, according to MarketAxess data. And NH Hotels' €400m 4% July 2026s were seen at 99.90. "Investors are buying what the Fed is saying, in that inflation will be transitory," said a second banker. "As long as they buy that, I don't think we'll see a lot of volatility." Still, investors have little margin for error if inflation does not trend in their favour for the longer term. Average yields on junk bonds are still near all-time lows, at 2.38%, according to iBoxx data. "Of course, if it turns out that inflation rates go up more than they expect, then bonds are definitely underpriced – credit spreads are close to their tightest levels," said the second banker. "There's always a tail risk in terms of inflation, but so far it seems that investors trust what central banks are telling them.""Hold your nose" Investors said that as long as high-yield continues to offer value versus other asset classes, spreads will remain tight. "There's a pretty simple underlying explanation for the market as a whole, looking at yield curves," said a high-yield investor. "The reality is, as long as risk-free curves remain pushed against year-to-date lows, money will flow into credit. The best we can hope for as active stock selectors is to hold your nose and buy, [for example], hotels. That's the path to alpha. But there's still a lot of risk with these sectors not being appropriately discounted." Bankers said that Madrid-headquartered NH Hotels' €400m high-yield bond was one highlight of the week. The company (B3/B–) priced the deal at 4%, versus initial price thoughts in the low to mid-4s. Global coordinators were BNP Paribas (B&D), Deutsche Bank, BBVA, CaixaBank and Santander. "I'm quite impressed by the pricing they got when you look at how bad the impact of Covid-19 was on the company," said the second banker. "Of course, they're selling the deal on the basis that they will recover – as with all of these Covid-impacted names." Investors said that leads had pre-marketed the deal, proceeds from which were set to take out NH Hotels' 3.75% senior secured notes due October 2023, while Antolin is redeeming its 3.25% April 2024s. NH Hotel expects to have 90%–95% of its hotels back open by the end of June. As of May, 70% of the group's hotels were open and occupancy was at 25%, according to the company's Q1 2021 results. Another reopening trade is in the works from British pub company Punch, which sent out price talk of 6.25% area for its £600m five-year non-call two senior secured fixed-rate sterling bond (B3/B+). Initial price thoughts were in the mid-6s. Joint global coordinators are Barclays (B&D) and NatWest Markets.
Bellwether