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5th April 2020

❔The high yield market mystery

MARKET CLOSE:
iTraxx Main

114bp, +5.5bp

iTraxx X-Over

637.5bp, +25bp

10 Yr Bund

-0.44%, unchanged

iBoxx Corp IG

B+251bp, unchanged

iBoxx Corp HY

B+775bp, unchanged

10 Yr US T-Bond

0.60%, -2bp

FTSE 100

6144.25, (+1.26%)
 DAX

11657.69, (+1.33%)
S&P 500

3036.13, (+0.74%)

High yield isn’t ticking any boxes…

On the surface of it, the relatively resolute performance of the high yield market takes some explaining. The iBoxx index gapped to B+2000bp in 2008 at the height of the financial crisis. This time, we barely saw B+900bp at the peak of the panic just over a week ago. That was a commendable effort.

Over a decade ago, the high yield market in Europe was under €50bn in size (might explain the huge widening – a fledgeling and illiquid sector) whereas this time it is now circa €350bn in size (no longer an immature market but still illiquid). Performance-wise, though, HY lost almost 40% in 2008 while in Q1 this year the index lost over 15% in total return terms.

Is the worst still to come? Economic activity, as expected, has collapsed. We’re in depression territory. We can see that many corporates will have bought themselves some time with the heavy capital markets activity over the years. But revenues, profits, debt and credit metrics and the like will have come under some pressure in Q1, much more in Q2 and will likely fall through the floor in Q3.

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