High-Yield Bond Market Sees Modest Gains in Q2 Amid Refinancing Activity
The high-yield bond market experienced a moderate upswing in the second quarter, with the ICE BofA US High Yield Index rising 1.09% and the option-adjusted spread widening by six basis points to 321 basis points. The quarter saw $77.9 billion in issuance across 124 deals, slightly lower than the $87.6 billion recorded in the first quarter.
Refinancing activity dominated the quarter, accounting for 79% of proceeds, followed by general corporate purposes (12%), acquisition financing/LBOs (6%), and dividends (3%). Additionally, there were $1.8 billion in fallen angels across three issuers and $5.4 billion in rising stars across four issuers.
Fund flows remained positive, totaling $900 million, although they decreased from the $4.6 billion inflow in the first quarter. Default activity slowed, with a par-weighted high-yield bond default rate of 1.7%, according to JPMorgan. The US High Yield strategy gained 1.07% (net of fees) for the quarter, underperforming its benchmark.
The portfolio’s overweight exposure to the real estate sector and underweight to the telecommunications and media sectors contributed to its performance. However, underweights to the financial services and healthcare sectors hurt relative performance. The portfolio’s underweight exposure to the riskiest subset of the market also helped relative performance.
Looking ahead, the labor market appears to be weakening, with signs of a slowdown in job growth and a slight increase in the unemployment rate. Inflation data has also turned weaker, which could provide relief to the market. However, the yield differential between 10-year and two-year Treasuries remains essentially unchanged, and the Fed’s messaging suggests a less dovish tone.
We believe the yield curve should steepen, driven by either the Fed cutting short-term rates or higher-than-expected inflation combining with an increase in term premium due to increasing Treasury supply. While the probability of recession has grown materially less likely, it is still too early to declare victory, and interest rate volatility is expected to remain elevated.
Please consider the investment objectives, risks, charges, and expenses of a fund carefully before investing. For more complete information, you may obtain a prospectus or summary prospectus by calling 800-823-6300 or visiting www.lazardassetmanagement.com. Read the prospectus or summary prospectus carefully before investing.
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