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 closes at any hint of trouble. However, we think that the high yield bond market might just have lost its fledgling tag.
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! Since then though, the performance has been more rangebound.
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.
The more measured performance since the summer months has left the index, as at the end of September at B+385bp, helped by a 13bp tightening in that month. It is probably difficult to see how we can break lower, even as supply levels run at record levels in the year so far. The macro outlook for Europe is still not totally clear, while choppy European equities does have an impact on spreads/sentiment, owing to the strong correlation between the two asset classes.
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 3.83% – and investors have been pushing back on deal pricings in some cases. The index yield has have backed up 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 2020/21. With underlying yields (rate markets) looking anchored around current levels on uncertain 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.