Barclays: High-grade issuance shifting; junk stays attractive; Fed actions lead to shorter-dated bonds

By Andrea Heisinger

New York, June 21 - The credit markets will continue to react to announcements out of the Federal Reserve about tapering of quantitative easing, but there are still bright spots in investment-grade and high-yield bonds, analysts from Barclays Capital said at a global outlook briefing Friday.

In the broad scope, bonds are likely to underperform in the near term, and government bonds have been pulled down to underweight, said Michael Gapen, asset allocation strategist and senior U.S. economist.

Gapen added that they are advising investors to hold much shorter duration Treasury bonds, as longer-dated maturities will suffer as the Federal Reserve tapers its quantitative easing efforts. The bank is predicting this will begin later in 2013, with quantitative easing wound down completely in the first quarter of 2014.

Junk attractive

And as the economy improves, high-yield bonds will look more attractive, Gapen said.

Brad Rogoff, head of credit strategy at Barclays Capital, said that there is a "real contrast going on between technical and fundamentals."

In the past six weeks outflows from the retail sector have really affected the markets, Rogoff said.

In the month of May, junk bonds broke through the 5% yield mark for the first time, he said, with that level now at about 6.5% with a spread of 500 bps, largely due to fund outflow in retail.

"You're going to see a negative net outflow for the year," Rogoff said of the high-yield market.

Investment-grade flows have been close to zero recently, he added.

IG issuance shifting

While there has been a lot of opportunistic issuance of high-grade bonds in recent months, that will be shifting in this new hesitant environment.

Rogoff said that the "key thing to think about is a lot of the new issue market is nonessential."

The last 1½ years has seen a lot of opportunistic issuance.

Floating-rate notes and shorter duration maturities of three years to five years will become more attractive, he said, with new issue concessions not expected to go up dramatically.

There will, however, be less opportunistic issuance.

"Assuming we do get some rate stability, we'll keep seeing people refinancing 6% debt with 3% debt," Rogoff said, referring to the high-grade market.

There are also historically cheap rates in high yield, at 6.5% versus 8% of the recent past.

Junk bonds are expected to see a return of 6% to 8% in 2013, despite a loss in the market Thursday, Rogoff said.

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