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Marktkommentar I High Yield Monthly Update

High Yield Update – Views from our High Yield investment boutique, NCRAM

May 3, 2022

David Crall, CFA
CEO and CIO, Nomura Corporate Research and Asset Management Inc.


US High Yield

The US High Yield market dropped -3.63% in April, bringing YTD performance to -7.96%, as measured by the ICE BofA US High Yield Constrained Index (HUC0). As the market declined on the month, yields for the market overall increased by 102 bps to 7.06%, and high yield spreads widened by 54 bps, rising to 398 bps. The sell-off was broad based, and the ratings categories performed similarly, with BBs down -3.66%, Bs down -3.37% and CCCs down -4.02%. The Gaming, Leisure, Steel, and Transportation sectors fell less than the market, while Cable, Healthcare, and Building Materials underperformed.

The primary driver of the correction was the escalating hawkishness of the Fed. The Fed is increasingly concerned about inflation becoming entrenched, and they are eager to bring Fed policy back to a neutral level. At the beginning of the month, the Fed was expected to raise rates eight additional times in 2022, and now the market expects the equivalent of 10 additional increases. Furthermore, the Fed has guided to multiple 50 bps increases, with the possibility of a 75 bps increase, and they are expected to begin balance sheet run-off, also known as quantitative tightening, in June, with a three-month ramp to $95 billion per month. This increasingly hawkish guidance from the Fed has caused price pressure across the fixed income markets, and the 5-year Treasury yield increased from 2.46% to 2.96% on the month while the 10-year Treasury increased from 2.34% to 2.94%. For the year to date, the 5-year Treasury yield is up 170 bps and the 10-year Treasury yield is up 143 bps.

Even as Treasury yields increase, the market is wondering if the economy may slow in later 2022 or 2023. So far, final demand appears generally intact. Companies have reported that lower income consumers are trading down in the face of price increases, but other parts of the economy are still benefiting from the momentum and wealth creation of the past few years. The housing sector, while usually sensitive to higher interest rates, is reporting that there is still an excess of demand compared to supply. Most companies have passed on cost increases, leading to solid corporate profitability. However, the Fed feels the necessity of slowing the economy to some degree, so the market is beginning to ponder that on the horizon. At the same time, the Russian war and China’s Covid lockdowns are both increasing inflation and reducing economic growth, and therefore contributing to the bearish tone in the market.

After the sell-off, much of this concern is priced into the high yield market. As high yield bond prices fall, their convexity improves, and lower dollar prices can offer an attractive risk/reward. Furthermore, we do not expect a significant increase in default rates, so the yields look increasingly attractive for a well-constructed portfolio. As always, we will do our best to navigate the markets carefully.

 

Global High Yield

The European high yield market continued to trade poorly in April. The ICE BofA European Currency High Yield Constrained Index (HPC0) lost -2.78% in April and is down -7.32% YTD in local currency terms. High inflation, signs of an increasingly hawkish ECB, along with the Fed, and concerns about a growth slowdown all weighed on the market. While some optimism about a potential ceasefire in Ukraine had triggered a recovery in late March, it is now clear that the conflict is likely to drag on for some time, with implications for both commodity cost inflation and commodity access. Late in the month, Russia cut off gas shipments to Poland and Bulgaria. While many European countries are working hard to secure alternative sources of supply, the higher prices and uncertainty of supply from Russia are clear negatives for European growth. Rising inflation and the associated likely policy response have caused a historic increase in yields, with the 10-yr Bund yield rising to 0.94% at month end, from 0.55% at the end of March and -0.18% at the end of 2021, pressuring all of European fixed income. While BBs continued to perform poorly in this environment, Bs began to underperform later in the month as concerns shifted to growth fears and market liquidity deteriorated.

Emerging markets (EM) hard currency sovereign bonds, as measured by the JPMorgan Emerging Markets Bond Index Global Index (EMBIG), posted a -5.48% decline in April, accumulating a -14.23% loss year-to-date. Continuing market re-pricing of Fed tightening in light of inflationary pressures was the main market driver for EM fixed income in April. The EMBIG spread to maturity widened 32 bps in April to 379 bps over US Treasuries, most of it coming from high yield credits, which widened 50 bps, compared to 14 bps widening in investment grade credits. Our long-standing underweight duration stance, tilt to high yield credits, and higher-than-average cash balance allowed our EM sovereign strategy to outperform its benchmark on a relative basis in April.

EM high yield corporate bonds, as measured by the ICE BofA High Yield US Emerging Markets Corporate Plus Index (EMUH), declined -2.56% in April (-12.47% YTD), outperforming EM sovereigns and US high yield on the back of recovery in some Chinese property and European credits that outperformed. With the price action in April, the EMUH index spread to worst ended at 651 bps over US Treasuries, or about 230 bps wide to US high yield credits. Credit selection in China, our underweight duration stance, and higher-than-usual cash balances allowed our EM corporate debt strategy to outperform the index in relative terms in April.

 

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