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. Issuance levels though hit a record €75bn+ in 2017, but the reality is, this market still closes at any hint of trouble. However, we think that the high yield bond market might just have lost its fledgling tag.
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ii) High Yield Bond Index: Spreads 2015-
The ECB’s IG QE-effort had obviously forced investors down the curve and into funding borrowers not normally in their portfolio remit (2016-2018). The forced shift had seen funds take more sub-investment grade debt into their mandates/portfolios, and so this market had squeezed to record historical tights in spreads.
Nevertheless, the high yield market came under big pressure in 2018, largely on the back of the weak equity performance on fears around global macro. The correlations between the two markets remained high. Spreads as measured by the iBoxx index widened by 240bp (almost doubling) while we still had over €60bn of supply – making it the second best year for deals in history for try euro-denominated market. Total returns came in at -3.6% in 2018, the worst annual performance in a decade for high yield.
As for 2019, returns have jumped to above 11% in the year to end September, spreads have tightened by over 100bp and issuance approached €50bn. The market hasn’t tightened as much as thought it might have, but we do look for the compression versus IG to recommence in 2020, if not sooner.
iii) High Yield Bond Index: Yields
Funding costs for borrowers have backed up from record low levels. The index yield record low of 2.31% was seen back in November 2017, but is now at 3.40% (September 2019) – and investors have been pushing back on deal pricings in some cases. The index yield is down from the 5.01% print in January 2019.
The primary market has been delivering, though, and the wall of funding crunch is not an issue for the broader market. Corporates had been taking advantage of the demand for high yield risk by borrowing at a decent clip and pushing redemption profiles out, to 2021/22.
Underlying yields (rate markets) are anchored at worst on uncertain macro in the Eurozone, but the ECB QE programme might well see a renewed push lower. That HY/IG compression trade as investors are crowded out of the IG market might see us at a sub-3% level in early 2020.