In the past two years, net issuance of high-yield bonds has declined significantly. A sharp rise in the cost of capital coupled with a phase of enormously increased new issues in 2020 and 2021 led to a slump in the size of the European high-yield market. In addition, there are a considerable number of issuers that enjoyed credit rating upgrades and have as a consequence exited the HY market, known as “rising stars” – outpacing the number of “falling angels” (IG-downgrades to HY). On top, a higher number of companies went bankrupt and left the market. These factors, combined with positive cap ..read more

Core economies sustained late-stage expansion, while China pursued policy adjustments aimed at stimulating economic growth. Market optimism drove the S&P 500 to record highs, supported by robust economic indicators, including a strong job report and GDP growth exceeding expectations. The Federal Reserve’s hawkish stance on interest rates and uncertainties surrounding inflation and domestic demand tempered sentiment. The ECB maintained rates, awaiting economic stabilization evidence before potential policy adjustments in June. In China, economic challenges persisted, with weak retail sales ..read more

The performance of local emerging market debt portfolios has historically been relatively closely negatively correlated with changes in the US 10-year treasury yield. For example, the drop in US 10-year yield during 2020 COVID pandemic preceded rally in local EM debt. Subsequently, rise in US inflation and interest rates in 2022 triggered a selloff across EM markets. After peaking at almost 5% in October 2023 the subsequent 100 bps decline in US 10-year yield resulted in only relatively modest recovery in local EM, which quickly lost pace after reinforcing of higher-for-longer US rate path ..read more

Following the rally on credit markets during Q4 2023, more than a third of US High Yield keeps trading at credit spreads below 200bps over risk-free rates. On a risk-adjusted basis, such spreads remain tight from a historical perspective, especially when a challenging macroeconomic outlook is considered. While overall a yield of 8% on US HY corporate market remains attractive compared to long term averages, there is an increasing dispersion among HY issuers. The differences in HY corporates fundamentals and outlooks, combined with higher refinancing costs due to FED’s ongoing tight monetary ..read more

The economy faces a slowdown with rising capital costs, yet resilient consumers and government support avert an imminent recession. Markets expect a “soft landing” economic cooling. Market sentiment pivoted favourably as the perception of inflation underwent a positive shift. Anticipated 2024 Fed rate cuts, a departure from the prior hawkish stance led to a decline in US Treasury yields to 3.9%, signalling an expected 150 basis point reduction. Mild inflation data reinforces the belief that the ECB has finished its hiking cycle, increasing the probability of maintaining a restrained policy st ..read more

Current market yields continue providing an attractive entry point across sectors in context with their historic downside risk, calculated as standard deviation of negative monthly returns over the last 10 years. This includes particularly adverse events, such as March 2020 market selloff (COVID pandemic start) and broad market repricing during one of the steepest rate hikes in history. On this yield-over-risk basis, senior syndicated loans stand out, as their yield of 10% is more than eight times the negative return deviation exhibited historically over the 10-year horizon. One of the reaso ..read more

With yields at almost 10% p.a., US HY offers investors a very solid buffer during adverse market development. This can be illustrated by a hypothetical multi-factor 12-month scenario, stressing the projected total return with a simultaneous risk-free rate curve steepening (-25bps on short and +100bps on long maturities), credit spreads widening (+200bps) and elevated realized defaults (5% default rate with 40% recovery). Given shorter duration (i.e. 3.5 years), HY markets are less sensitive to risk-free rate moves and curve steepening in particular. Hence a very small positive impact of +0.8 ..read more

Historically, the income and total returns on European broadly syndicated loans have been comfortably exceeding realized default losses. This trend is evident from the chart with incomes, comprising of interest and fees, exceeding 4% and realized losses well below 1%. Total returns with mark-to-market component have also remained strong with the exception of 2022 market selloff. The rising interest rates have been fueling strong 2023 returns, with income of 10+% still providing substantial buffer against prospect of rising defaults. As the attractive market yields pose challenging financing c ..read more

Historically, the income and total returns on European broadly syndicated loans have been comfortably exceeding realized default losses. This trend is evident from the chart with incomes, comprising of interest and fees, exceeding 4% and realized losses well below 1%. Total returns with mark-to-market component have also remained strong with the exception of 2022 market selloff. The rising interest rates have been fueling strong 2023 returns, with income of 10+% still providing substantial buffer against prospect of rising defaults. As the attractive market yields pose challenging financing ..read more

The yield breakevens, calculated as yield divided by duration, indicate by how much can yields rise, or credit spreads widen, before incurring capital loss equal to annual yield accrued on investors’ holding. A ratio of 1.0 implies that 1%point increase in yield or spread eliminates the entire year’s worth of yield accrual. As evidenced on the chart, HY (up to 3 years maturity in particular) and syndicated loans (modelled with a 3-year remaining life) offer investors higher protection than more sensitive investment grade credit and agency mortgage-backed securities. From the yield and breake ..read more