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.
Euro HY primary issuance is running at a record run rate, but the impact on secondary has been limited. We widened hard in February and March, but a good primary market in April didn’t impact secondary. In fact, secondary spreads tightened by almost 20bp in April and again in July – by some 40bp!
ii) High Yield Bond Index: Spreads 2015-
The ECB’s IG effort has obviously forced investors down the curve and into funding borrowers not normally in their portfolio remit. However, the forced change has seen funds take more sub-investment grade debt into their mandates/portfolios, and so this market has previously squeezed to record historical tights in spreads.
As we closed out July, we saw a renewed liking for the HY market and spreads tightened by 40bp, with total returns up an impressive +1.5%. Should equity markets hold up through the remainder of the quarter and event risk remain relatively light, then we could be looking at a continuation of the current positive trend in spread direction (now at B+376bp, versus B+286bp at the start of the year and an early July index wide for the year of B+423bp).
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 3.72% – and investors are pushing back on deal pricings in many cases. Index yields have backed up though from 2.81% at the beginning of the year.
The primary market is delivering, though, and the wall of funding crunch is not an issue for the broader market. Corporates are still taking advantage of the demand for high yield risk by borrowing aggressively and pushing redemption profiles out, to 2019/20. With underlying yields (rate markets) looking anchored around current levels on weaker macro in the Eurozone, then we will need an unlikely material weakness in spreads to see any further material rise in high yield corporate bond index yields.