High Yield Bonds | HY Bond Index Spreads & Yields

High yield bonds data: Hover over the charts to see the values at a given date.  iBoxx EUR High Yield Overall Index data provided by Markit Group Ltd

i) High Yield Bond Index: Corporate Spreads

The high yield bond market saw option-like returns in 2009. Total returns exceeded 70% in that year. Admittedly we saw the recovery come after some very depressed valuations into the end of 2008. Spreads were at their all-time wides on the back of the crisis and in 2008, there was zero issuance. Nothing. We think that the high yield bond market still retains its fledgling tag. Issuance levels may have hit €50bn+ in 2014/15, but the reality is, this market closes at any hint of trouble. European high yield credit benefitted from the high/low beta compression trade from 2012-2014, but subsequently came under pressure from the contagion impact of the US shale bust. It has now started some sort of recovery in early 2017, driven on by better economic news which might help boost credit metrics – but also from being more immune to any movement in rates.


ii) High Yield Bond Index: Spreads 2015-

At B+368bp, the Markit iBoxx index has tightened by 45bp in the first quarter of the 2017. That’s supported by the default rate has been anchored at around the 2% level – but driven by the view that macro is improving in sustainable fashion. While we believe that the trend in spreads and issuance is failing to break-away from a close correlation with the US high yield market, we have seen some higher levels of supply and tighter spreads than we might have expected. We believe at these levels – and given the improving macro outlook, the high yield bonds market does still offer some good opportunities. And especially so in the double-B/high single-B sectors.

iii) High Yield Bond Index: Yields

Funding costs for borrowers have been dropping for a while and are at close to record low levels again. Spreads have tightened while the anchoring of the front end of the underlying (short duration market) has helped keep all-in costs pegged back. The primary market might be spluttering, but the wall of funding is not an issue as yet for the broader market. Corporates had taken advantage of the demand for high yield risk by borrowing aggressively and pushing redemption profiles out, to 2018/19. With underlying yields set to remain anchored around current levels (or not go materially higher), then we will need an unlikely material weakness in spreads to see any further material rise in yields.

 


High yield bonds >  Fund performance: Euro | Sterling