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 was running at a record run rate in early 2018, but the impact on secondary had 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 reflective of equities (hammered) and macro/geopolitical concerns.
Rabbit out of the hat
Credit not the only winner... Mario Draghi is a magician. There's little doubt left. Judging by the post-ECB rally in risk assets, the great conjurer has pulled it off again. Increasing Eurozone wage growth, the Chinese relenting on pork imports (out of necessity, in our view) amid rising trade-tariff optimism, US retail sales on the up in August and no-Brexit all fed into t [...]
Draghi: No happy ending
HY/IG compression: Shades of 2016... The President of the central bank might have been a little schackled, but Draghi largely likely got his way in finding some middle ground, enabling him to keep the doves and hawks both content. A compromise 10bp cut on the deposit facility to -0.50% - as well as a tiering system for banks' holding of excess liquidity - and €20bn of QE f [...]
Boneheads? Hmmm, quite
More sticky plaster, please... Negative rates are not natural and nature has a habit of expunging such aberrations. So, an ECB 20bp rate cut must be in the bag! All that's left to ponder is whether any accompanying QE is for €15bn to calm the dissenters, or €30bn to give the markets a turbo boost. For investors, we think it's a case of 'buy the rumour, sell the fact' [...]
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 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 weak equity performance. The correlations between the two markets are 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.
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 5.00% – and investors have been pushing back on deal pricings in some cases. The index yield has have backed up from 2.81% since the beginning of 2018 alone.
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 aggressively and pushing redemption profiles out, to 2020/21. With underlying yields (rate markets) potentially anchored around current levels on uncertain macro in the Eurozone (underlying rates supported), then we will need a material weakness in spreads to see any further material rise in high yield corporate bond index yields.
Primary issuance will decline markedly though in 2019.