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The first factor is leverage buy-outs. During 1980s high-yield bonds were a controversial instrument in the United States because of their use in financing hostile take-overs and leverage buy-outs.
Then leverage buy-outs were a major source of primary high-yield bond issuance in the United States, thus having a positive relationship between leverage buy-outs and high-yield bond diffusion.

The second factor considered is M&A activity. The high-yield bonds are less frequently used to finance M&A than investment-grade bonds, as investment-grade companies acquire other companies. Thus, there is a negative relationship between high-yield bond diffusion and M&A activity.

Given that a major part of revenues obtained from high yield bonds are used to finance investment and other business-related financing needs, the third macroeconomic variable taken into account is industrial production. The impact of the business cycle on the diffusion of high-yield bonds could work in both directions. On one hand, when the business cycle heads upwards, the financing needs of high-yield bond issuers, which are mainly high-growth companies, tends to grow above that of other industries; thus suggesting a positive relationship. On the other hand, the share of fallen angels in the high-yield segment of the corporate bond market rises during economic downturns implying a negative relationship between high-yield bond diffusion and industrial production.

The fourth macroeconomic variable taken into account is stock price developments. An increase in stock market prices implies an increase in the market value of the firm and from an investor perspective, rise in stock price is generally associated with improvement in economic activity and lowering of risk, thus increasing the demand for high-yield bonds.

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* Contributed by: -
Jayanta Das & Kartavya Soni,
ICFAI Business School, Hyderabad.