High yield debt: a blockage in the system?

One consequence of the widely discussed hunt for yield has been enduringly strong flows into high yield assets. What is perhaps less known is how much those markets have grown over the long term. Net annual flows into the asset class have been positive in 17 of the past 23 years, for example. Net outflows have only occurred in six of those 23 years.

Meanwhile, retail ownership in the asset class has also skyrocketed. According to Morgan Stanley data, about 20% of US high yield is now owned by mutual funds or ETFs. That compares with 5% in 1993. More of the market than ever before is now owned by retail investors.

Accompanying this overall growth in the levels of debt has been a decline in the ability of the market to cope with inflows and outflows, as increased regulation, such as Basel III, has stymied the ability of banks to take on inventory.

As the market has grown, the amount of dealer capital available to trade fixed income has fallen. The liquidity of bond markets versus equities has always been low but now it is even more so. The trend is reflected in the frequency of bond trades versus that of equities. In January 2015, for example, the percentage of NYSE stocks with zero trades was 0.1%. For bonds, that figure was 53%. The percentage of equities with more than 25 trades a day was 99.7%. For bonds, that figure was just 0.4%.

Raman Srivastava – Standish, a BNY Mellon company

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