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Issuance in high yield debt in the US junk market for the last eighteen months is shown in the graphic below. Issuance in the first quarter of 2023 was a mere USD38bn, and for a while it looked as if 2023 was going to be another ‘famine’ year in keeping with 2022. Stale arranger positions from previous M&A transactions, plus concerns about escalating inflation and rising interest rates all continued to haunt the market as they had for most of 2022, which saw the lowest annual volumes in at least a decade.

The graphic also shows that issuance picked up markedly in the second quarter (USD53bn), however, meaning 2023 is now unlikely to plumb 2022’s volume depths.

Our reports for the past half-year have recorded that bank arranger commitments on old deals have been wound down, inflationary pressures in the US have eased and bond yields, in the US at any rate, have stabilised. The junk bond market has slowly come back to life over the period, although volumes are still moderate rather than heavy. Even though issuance in 2023 is already close to eclipsing that for the entire year of 2022 with only six months of the year gone, 2023’s volumes are nevertheless way below the first half of 2021 and 2020, as the below graphic shows.

The unwinding of stale positions in the US junk market in the first half of 2023 has been accompanied by a somewhat smoother period of economic events than in the previous half year. The big concern for many economists over much of the last six months has been how the Fed’s string of interest rate increases might affect economic growth. There was much speculation that the US might be facing a recession in 2023, an outcome that historically has sent junk bond markets into freefall. The evidence so far, however, is that the US economy continues to expand.
There were also signs the Federal Reserve may be coming to the end of its upward rate movement phase as we approached the end of the first half. Policymakers decided to pause the interest rate increasing phase for one meeting in June.
The Fed insisted at the time of its June rate decision that we are not at the end of the interest rate increase phase, but subsequent data showing further slowing in the economy introduced a note of scepticism from investors about the Fed’s comments. US stocks have performed well over the period on the basis the Fed might be finished in terms of rate increases, but even at the end of June Fed Chairman Powell emphasized there are more to go.
The market had credit shocks to contend with in the first half of 2023, less hostile economic conditions notwithstanding. Several US regional banks were closed or taken over, and the US government narrowly avoided a default with an eleventh hour agreement on the debt ceiling.


US HY spreads in 1H 2023 – the dog that didn’t bark
The prevailing mood of analysts’ reports that Bond Radar saw and reported on in the first half of 2023 were downbeat, with most analysts opining that junk credit was set to be under spread widening pressure. So far these predictions have not come true.
Junk spreads started the year at curve plus 470bp and are ending the first half at curve plus 430bp, according to ICE BofAML data. The high for the year was just shy of curve plus 500bp and the low approximately curve plus 415bp. Our reports in recent months have detailed a litany of gloomy predictions for junk bonds in the US, but in terms of actual spread movements, the junk bond market is the dog that has not barked. Spreads have not taken the huge hit that some predicted (indeed they have tightened) and volumes have persisted moderately.
One reason for the doom defying junk bonds performance may be that the market is offering close to the highest yields since the spring of 2020, when the covid crisis first hit. If we strip out that brief spike upwards in yields in March 2020, and look further backwards, then yields are not far from the highest since 2016. We are closing out June 2023 at approximately 8.50% on the ICE Bofaml effective yield monitor. The high for yields since 2016 (ignoring the spike in March 2020) was in the autumn of 2022 at approximately 9.50%.
JP Morgan points out that the ‘contraction’ in the total size of the amount of junk bonds outstanding may be another reason that market has outperformed some expectations in the first half of 2023. On a net basis USD63.5bn has left the junk market in the first half of 2023 on ratings changes (upgrades versus downgrades), approximately 3% of the total outstanding paper. JP Morgan also points out that the market ‘contracted’ in a similar fashion in 2022, except on a larger scale (some 11% of the total). The contraction has, by implication, left investors sharing less paper, at a time when new issuance is also very light.
Money flowed out of high yield funds in the first half of 2023, but according to Lipper data the net outflow is modest, at just over USD10bn.

Deal highlights for June 2023
In terms of issuance, the month of June started very slowly with just USD4.5bn pricing by 12 June and a further trickle of deals in the second week of June taking the market to USD7bn. We had reached USD13bn by 30 June, making June one of the slower months of the year so far.
The economic data was broadly supportive for the market across the month with numbers showing the Federal Reserve’s moves to ease inflationary pressures appear to be working. Price pressures are easing. At the same time, rising interest rates seemed to be having a modest effect on growth, with data in late June showing employment was particularly resilient.
The chart below shows that June was a very big month for deals in the energy sector, relatively speaking, with just over USD4bn out of just shy of USD10bn. Civitas Resources printed the largest of these oil and gas deals with an offering of USD2.7bn.
The Civitas deal was its first on Bond Radar records, and the company tapped the market to raise money for acquisitions. Civitas has agreed to acquire new drilling assets in Tap Rock’s Delaware Basin and Hibernia Resources, Midland Basin (according to its website). The asset acquisitions will cost USD4.6bn, with the bonds raising USD2.7bn of the cash. The company chose to announce its deal on 20 June in two tranches of 5NC2 and 8NC3 tenors. There was a two-day roadshow, after which price talk emerged at 8.50% area and 8.875% area respectively. The deal launched at yields of 8.375% for the 5NC2 and 8.75% area for the 8NC3 with the size split evenly between the tranches (USD1.35bn each). The notes received ratings of B1/BB-/BB-.
June was a high-volume month for a rare breed of debt, the US junk bond financial, as the graphic below shows.

The strong performance in June for this sector was largely due to a USD2.175bn deal for the insurer Hub International on 08 June (worth USD2.175bn) but there were also deals for OneMain Finance and Burford. Hub raised the money to refinance loan facilities dating back to 2018 and 2021 and to pay down a revolving credit facility. Price talk emerged at 7.375% area on 07 June and the notes priced a day later at a yield of 7.25% for a 7NC3 structure. The secured notes were given a rating of B2/B.
Outlook - ticking rate timebomb?
S&P is making markets aware of an interest rate timebomb that may be ticking away under the junk bond market.
The ratings agency noted in a report in June that high yield companies rely more on floating rate products than investment grade equivalents and so are more vulnerable to the upshifts we have seen in interest rates around the western world in past 18 months.
The S&P report shows that median interest rate servicing costs are rising sharply for all junk companies with the weakest credits, not surprisingly, seeing the biggest rises. In the US sphere, overall debt servicing costs for single B companies have risen from between 4.5% and 5% to between 5.5% and 6.2%. Servicing costs for BB companies have risen from approximately 4.50% to approximately 5.00%.
S&P also looks at the maturity profile for that portion of a junk company’s debt which is fixed, and concludes the maturity wall is getting higher in the coming years. USD250bn will need to be refinanced in the US junk debt market in 2024, according to S&P, with the number climbing to almost USD400bn in 2025, and then pushing through USD400bn in 2026. S&P points out that if US interest rates are higher for longer, then companies will be rolling over these debts at higher rates than they are currently paying.
S&P thinks that these rate increases in floating rate borrowing now - and in the fixed market in the coming years - will put pressure on junk company finances going forward. Finances may especially deteriorate if higher servicing costs are coupled with a poor performance by junk bond issuers regarding profits on an EBITDA basis (but the S&P survey does not provide an economic outlook that could suggest whether earnings may deteriorate or not).
In terms of the timescale of when investors may see evidence that some companies are struggling, S&P thinks the position of the market will decay ‘slowly but surely’.
Fitch thinks the second half of the year is the time that predictions of higher default rates in the junk bond market, which to be fair have been around for a little while now, will actually turn into reality. The ratings agency sees a number of 4.00% to 5.00% by the end of the year on a twelve-month trailing basis, up from just under 2.00% now.
Morgan Stanley and JP Morgan agree with Fitch to a greater or lesser extent, with Morgan Stanley more hawkish in its prediction for the upsurge in the default rate (‘above long-term averages’). JP Morgan expects a default rate for bonds of approximately 3.00% in a year’s time.



Lead manager moves
The league table for the US high yield market for the first half of 2023 is shown in the table below. A stellar performance by Goldman Sachs has seen the bank grab top place in the table for the past half year, ahead of the two banks that normally dominate the table – JP Morgan and Bank of America. An impressive performance by Deutsche Bank sees it power into fourth place, splitting the domestic banks. BNP Paribas makes a rare appearance in the top 10 whilst Credit Suisse, a name that featured regularly as a top 10 arranger in our reports down the years, has now disappeared after being swallowed up by UBS.


All data, unless otherwise stated, sourced from the Bond Radar Data Wizard