High Yield Corporate Bond Index Spreads and Yields

iBoxx EUR HY Overall Index data provided by Markit Group Ltd

i) HY Index Corporate Spreads

The high yield 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 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 HY 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) HY Index Spreads 2015-

At B+375bp, the Markit iBoxx index looks well poised to push lower. That’s supported by the default rate has been anchored at around the 2% level. However, the trend in spreads and issuance has failed to break-away from a close correlation with the US HY market. We believe at these levels and even given the improving macro outlook, the HY market does offer some good opportunities. And especially so in the double-B sector.

iii) HY 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.