High yield’s fall from grace

A sudden reversal in high-yield spreads has halted the seemingly unstoppable momentum of the market. LBO risk, a healthy pipeline of new issues and waning demand from hedge funds are some of the factors behind the turnaround, but a major concern is the arrival of General Motors and Ford debt into the sector. Oliver Holtaway reports

Please note that market participants interviewed for this article commented before S&P’s downgrade of GM and Ford.

Spreads in the high-yield sector have widened since mid-March, in line with high grade, and are now back at 2004 levels. From tights of 270 basis points over mid-swaps, the high-yield index now stands at around 385bp over mid-swaps. In percentage terms, the recent widening is among the sharpest shifts ever seen in the market.

“The market gave up in the last