Marktkommentar I High Yield Monthly Update
High Yield Update – Views from our High Yield investment boutique, NCRAM
Published Feb 1, 2021
David Crall, CEO and CIO, Nomura Corporate Research and Asset Management Inc.
US High Yield
The US high yield market returned 0.39% in January, according to the ICE BofA US High Yield Constrained Index (HUC0), as the outlook for a strong economic recovery in 2H 2021 remained intact. Vaccine distribution is improving and seems likely to make a lot of progress in the next few months. The Democrats winning the Senate in early January smooths the path for greater fiscal stimulus in the $1.5 trillion area, and the Fed continues to discourage any discussion of tapering their $120 billion of monthly asset purchases. Furthermore, the US consumer savings rate is surprisingly high, and we believe this will lead to a meaningful release of pent-up demand in the second half. Beyond this backdrop, oil rallied from WTI $48.52 to $52.20 in January thanks to the demand outlook and OPEC supply constraint, supporting the Energy sector of the market. Collectively, this bullish economic outlook led the 10-year Treasury yield to back up from 0.91% to 1.09%, depressing returns on BB bonds, which returned 0.02%. B-rated bonds returned 0.22% and CCCs returned 2.36% thanks to economic optimism. The best performing sectors were cyclical sectors including Steel, Energy, Metals & Mining, Chemicals, and Aerospace, while the laggards were a combination of BB-dominated sectors like Cable and Covid-19 sensitive sectors like Gaming that saw profit-taking. US high yield ended the month with a yield-to-worst of 4.32% and an option-adjusted spread of 385 bps, in the range of our base case targets for the coming year.
While high yield saw a fairly normal month consistent with an optimistic economic outlook, it should be observed that outside of high yield we are starting to see signs of extreme speculation that is reminiscent of technology stocks in late 1999. Some commentators think the Roaring 20s is the right precedent for the next few years, and some investors have responded accordingly. Retail stock trading is up dramatically, and retail options trading has exploded. Speculation is seen in many corners including SPACs, Bitcoin and other cryptocurrencies, tech equities, electric car manufacturers, chat board short squeezes, and others. Back in 1999 and 2000, the Fed raised rates five times, but today they seem more likely to remain dovish. If so, the speculation may have a bit of room to run, though eventually unsustainable valuations will collapse. Some hedge funds are being forced to deleverage. So far, high yield seems mostly insulated from this activity. Going forward, our goal will be to avoid collateral damage in our portfolios, and we will watch the broader markets carefully. In January, a couple of our debt holdings were helped by the speculation in the issuers’ equities, and we sold into the rallies.
European High Yield
The European high yield market started the year on a firm note, returning 0.57% in EUR terms unhedged, according to the ICE BofA European Currency High Yield Constrained Index (HPC0). The market continued to benefit from the key drivers of late 2020. Positive vaccine development, continued monetary and fiscal support, and better than initially feared corporate performance all contributed to the stable-to-positive tone. The clearing of macro issues like Brexit and the US elections also supported the markets. While most of the developed world has experienced a holiday surge in Covid-19 cases and the growth of new, more contagious variants of the virus, in the latter parts of the month virus trends improved meaningfully and vaccine administration started picking up, though continental Europe is lagging other regions in vaccination trends. Valuations have come a long way and this effect left little room for higher rated bonds to continue their ascent. In this environment, CCCs dramatically outperformed the broader market given lower expected default rates. New issue volume also picked up dramatically in the second half of the month and caused some pullback in the secondary market.
Emerging Markets (EM)
Emerging market (EM) hard currency sovereign bonds, posted a -1.21% decline in January, as measured by the JPMorgan Emerging Markets Bond Index Global (EMBIG), driven mainly by higher US Treasury yields and heavy supply concentrated in long-duration bonds. The EMBIG index spread-to-maturity ended roughly unchanged in January from the end of 2020 at 324 bps over US Treasuries, while the index yield-to-maturity increased about 20 bps to 4.48%, mirroring the move in US Treasury yields. Inflows into the asset class were supportive in January, but issuers took note of supportive technical factors and low interest rates to tap the primary market aggressively with almost $40bn of new issuance. For the most part, new issues performed well, while the secondary market lagged, especially in some high beta credits. EM high yield corporate bonds, as measured by the ICE BofA High Yield US Emerging Markets Corporate Plus Index (EMUH), posted a -0.65% decline in January 2021 after a strong 4Q20 (+7.65%), as some large energy names with long-duration bonds dragged down performance in the index. EM corporate supply was heavy with about $80bn in January, half of it coming from Asia. Many EM issuers came to the primary market with either green or sustainable bond structures in what appears to be a new market trend. Our outlook for the year remains constructive on EM, and we expect market recovery as new issuance slows down and economic activity continues to pick up with stimulus and progress on vaccines.
NCRAM strategies generally performed well in the month thanks to portfolio tilts and credit selection. NCRAM surpassed $30 billion in AUM during the month, and we thank all of our clients for their trust in us.
We wish you the best in 2021.
This commentary was prepared by Nomura Corporate Research and Asset Management Inc. (NCRAM) and distributed by Nomura Asset Management U.K. Ltd and is for informational purposes only.
All information contained in this page is proprietary and confidential to NCRAM. All opinions and estimates included herein constitute NCRAM’s judgment, unless stated otherwise, as of this date and are subject to change without notice. There can be no assurance nor is there any guarantee, implied or otherwise, that opinions related to forecasts will be met. Certain information contained herein is obtained from various secondary sources that are believed to be reliable, however, NCRAM does not guarantee its accuracy and such information may be incomplete or condensed. Historical investment performance is no guarantee of future results. There is a risk of loss. Strategy performance references are based on gross of fees performance.
Certain information contained in this document contains forward-looking statements including future-oriented financial information and financial forecasts under applicable securities laws (collectively referred to herein as forward-looking statements). Except for statements of historical fact, information contained herein constitutes forward-looking statements. Although NCRAM believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, it can give no assurance that forward-looking statements will prove to be accurate. These statements are not guarantees of future performance and undue reliance should not be placed on them. Forward-looking information is subject to certain risks, trends, and uncertainties that could cause actual performance and financial results in future periods to differ materially from those projected. NCRAM undertakes no obligation to update forward-looking statements if circumstances or NCRAM’s estimates or opinions should change.
This document is intended for the use of the person to whom it is delivered. Neither this document nor any part hereof may be reproduced, transmitted or redistributed without the prior written authorization of NCRAM. Further, this document is not to be construed as investment advice, or as an offer to buy or sell any security, or the solicitation of an offer to buy or sell any security. Any reproduction, transmittal or redistribution of its contents may constitute a violation of the U.S. federal securities laws.
Performance data is calculated by NCRAM based upon market prices obtained from market dealers and pricing services or, in their absence, an estimate of market value based on NCRAM’s pricing and valuation policy. Performance data stated herein may vary from pricing determined by an advisory client or by a third party on behalf of the advisory client. Performance data set forth herein is provided for the purpose of facilitating analysis of account assets managed by NCRAM, and should not be used for the purpose of reporting or advertising performance of specific account portfolios to account beneficiaries or to third parties.
An investment in high yield instruments involves special considerations and certain risks, including risk of default and price volatility, and such securities are regarded as being predominantly speculative as to the issuer’s ability to make payments of principal and interest.
A copy of NCRAM’s Code of Ethics and its Part 2A of Form ADV, are available upon request by contacting NCRAM’s Chief Compliance Officer via e-mail at Compliance@nomura-asset.com or via postal mail request at Nomura Corporate Research and Asset Management Inc., Worldwide Plaza, 309 West 49th Street, Compliance Department, 19th Floor, Attn: Chief Compliance Officer, New York, NY 10019-7316.
The views and estimates expressed in this material represent the opinions of NCRAM and are subject to change without notice and are not intended as a forecast or guarantee of future results. Such opinions are statements of financial market trends based on current market conditions. The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only, and is not intended to provided, and should not be relied upon as legal or tax advice.
This document is for information purposes only. The evaluations presented in this document are based on information from various sources which are considered to be trustworthy by Nomura Asset Management Europe KVG mbH (collectively with other group companies „Nomura“). No guarantee is given in relation to the accuracy, completeness or currentness of the information, calculations and forecasts. Nomura does not accept liability for any loss, damage, cost or expense resulting from the use of or reliance on the document or other written or verbal notices and information by the recipient, including his/her executive bodies, employees, advisors or representatives or other entities. All forecasts and calculations (or statistical evaluations) are for explanatory purposes only. They are dependent upon evaluations, models and historical data, as well as interpretation by Nomura. The forecasts and calculations are based on subjective estimates and assumptions and do not constitute a prediction of future developments, and should not be construed to mean that the occurrence of one possible future result is more likely than the occurrence of another possible future result.
The content of this document is considered as minor non-monetary benefit in the meaning of MiFID II and not to be construed as legal, business or tax advice or as a recommendation of any kind. Distribution and duplication, even in parts for the purpose of forwarding the information to third parties is only permitted after obtaining the prior consent of Nomura Asset Management Europe KVG mbH.