14th May 2020

HY Strategy: CMD Portfolio Performance Mid-May 2020

Market Overview

The corporate bond market has made a good comeback of late, mostly evident in the investment grade primary sector. The issuance pace is running at record levels and while April’s monthly deal flow was in itself a record (€57bn), May’s current total suggests it could even surpass that.

Importantly, the reopening of the investment grade market has provided somewhat of a boost to high yield primary. After having drawn a complete blank in the Feb 20 – 15 April period, we’ve since had around €5bn of issuance. Verisure reopened the market, but the likes of Netflix, Stada, Nokia and Synlab have followed.

The initial widening in spreads took us from an iBoxx index level of B+400bp as at the end of February to B+912bp at the peak of the weakness, on 23 March. The record wides came during the financial crisis when the index peaked at B+2200bp (although it was only a €50bn market then versus €350bn now). Spreads have since recovered around 50% of their coronavirus-related widening, with the HY iBoxx index now at B+670bp.

Admittedly, there has been little by way of secondary market activity, given that the obstacles to get a reasonable – or any – price in which to trade have been huge. Nor have we quite yet seen a blockbuster rise in defaults (that might come), in no small part helped by the corporate funding disintermediation over the past 10-years which has seen the need for immediate funding pushed out to 2021 and beyond. Weaker bond covenants have also played a part.

Since we started our CreditMarketDaily.com sterling HY portfolio, around the middle of April, our holdings have recorded total returns in the month of 3.8%. Against the iBoxx index, which has returned 1.6% (€ and £), it is outperforming. Our (albeit meagre) holdings so far comprise NewDay, Saga, Iceland and TalkTalk and they are at the more high-yielding spectrum of the high yield market.

As always, much is going to depend on how the macro environment evolves. Covid-19 vaccines are still some way away in terms of being successfully developed and available. There is some success, however, in antibody testing with the UK government announcing the 100% reliability of one developed by Roche.

Unfortunately, that good news is tempered somewhat given that we still have to grapple with the potential for second waves of the virus’ spread – and that might ultimately have an impact on how macro develops. For sure, markets will become more jittery and the potential for – expectation of – that much needed V-recovery will be diminished.

In a sense, the markets are looking through the bad news which will come their way through the rest of May and June (at least). There is still much to play for amid the elevated levels of uncertainty.

Suki Mann

A 30+ year veteran of the European corporate bond markets and in his role as Credit Strategist, Dr Mann has been ranked number one in the Euromoney Investor Survey eight times in ten years. Previously with Societe Generale and UBS, he now shares views of events in the corporate bond market exclusively here on CreditMarketDaily.com.