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Meet the Haves and Have-Nots of U.S. Corporate Credit 

March 31, 2016

Tracy Alloway, Bloomberg

Does the corporate bond market have an inequality problem? 

The bifurcation between bonds sold by investment-grade companies with stronger balance sheets and those sold by high-yield corporates with more fragile financials was on full display this week following a change in a proposed debt sale by Western Digital Corp. While the junk-rated maker of hard disks had originally planned to fund its acquisition of SanDisk Corp. through a $5.6 billion bond sale, lackluster demand from investors forced it to scale back the program to $5.23 billion of debt issuance.

Western Digital's reduced ambitions are emblematic of the dramatic divergence in the fortunes of issuers in recent months. All U.S. bond markets have recovered, but some have recovered more than others. For instance, sales of investment-grade, also known as "high-grade," debt total a healthy $454 billion so far this year, according to Bloomberg data, surpassing the $446 billion sold in the first quarter of 2015. Issuance of fresh high-yield debt has languished at $36 billion, compared with $86 billion a year ago. 

"There is a clear divide taking shape in credit. The bid for yield is lifting high-grade, while credit risk is thwarting high-yield," UBS AG analysts led by Stephen Caprio and Matthew Mish wrote in a note on Thursday. They point out that while money has continued to flow into junk-rated bonds, many of which have been sold by energy producers and have therefore rallied alongside the recent gain in oil prices, the inflows have not been supported by increased issuance in the primary market where new bonds are sold. Read more

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