Marktkommentar I High Yield Monthly Update

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

June 1, 2023

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

US High Yield

The US high yield market returned -0.95% in May, dropping high yield’s total return to 3.73% YTD, as measured by the ICE BofA US High Yield Constrained Index (HUC0). The 10-year US Treasury yield spiked 40 bps intra-month, driven by concerns that failure by the US Congress to raise the federal debt ceiling could ultimately lead to a default on government bonds. Yields retraced somewhat after Congress and the White House reached an agreement on spending restraint in exchange for the debt ceiling hike. The 10-year yield ended the month up 22 bps at 3.65%. Stubborn inflation data and mixed Fed commentary bolstered the view that the FOMC may not be finished tightening (even though a June hike appears unlikely), adding to the bearish sentiment on rates.

The high yield risk premium increased in May’s volatile macro environment. Spreads widened 16 bps, rising to 471 bps. Regardless of the spread widening, market fundamentals remain relatively strong. High yield issuers’ operating earnings surprised to the upside in 1Q23, with a plurality of companies reporting thus far delivering better-than-expected financial results. More than 30% of issuers guided 2023 earnings expectations higher, vs. about 10% guiding lower. In May, the leisure and retail sectors outpaced the high yield market’s performance, while broadcasting and healthcare lagged. Lighter exposure to interest rates helped CCC-rated bonds outperform, but BBs trailed the market.

Looking forward, all-in yields approaching 9% create an attractive entry point for committing capital to high yield. Continued robust cash flow growth has driven the market’s debt service coverage ratio close to decade-high levels. Furthermore, ongoing rising star upgrades (Occidental Petroleum’s $17bn of debt was upgraded to investment grade in May) and relatively light new issue volume are combining to bolster the market’s supply/demand dynamic in support of high yield bond prices.

European High Yield

The European high yield market was firm in May, with the ICE BofA European Currency High Yield Constrained Index returning 0.84% for the month and 4.22% YTD (EUR, unhedged). The investment environment was supported by generally constructive 1Q23 earnings, positive events such as M&A and asset sales, resilient economic conditions, and indications that inflation has peaked in Europe. Conditions in the US, headlined by the Fed indicating it is close to a pause and progress toward finalizing a debt ceiling deal, also helped the European market. Though rates showed some volatility, German bund yields ended the month slightly lower, as softer-than-expected core inflation in most European countries supported the market. B-rated bonds led the market higher, followed by CCCs, as the lower rated parts of the asset class caught up after lagging the initial recovery from the banking stress in March. Strong technical conditions continued to support the market given light new issuance.

Emerging Markets 

Emerging markets (EM) hard currency sovereign bonds, as measured by the JPMorgan Emerging Markets Bond Index Global (EMBIG), declined -0.89% in May (+1.85% YTD). Debt ceiling concerns and persistent signs of high inflation and strong labor markets in the US drove interest rates higher. Investment grade EM sovereign bonds underperformed, with a -1.25% decline in May on the back of higher US yields. High yield EM sovereigns performed slightly better (-0.35%), with some high-beta credits outperforming, particularly in the EMEA region and Asia. Recent Presidential elections in Turkey and Nigeria raised the prospect of potential changes in economic policy, which if materialized could serve as a positive catalyst lowering risk premia. The EMBIG index ended May with an average yield of 7.85% and spreads about 400 bps over US Treasuries. There is a dichotomy in the market between investment grade credits, where the average yield is 5.34%, and high yield sovereign credits, where yields hover around 12%.

Emerging markets corporates, as measured by the JPMorgan Corporate Emerging Markets Bond Index Broad Diversified (CEMBI BD), outperformed EM sovereigns with a modest -0.58% decline in May (+2.54% YTD). The CEMBI BD index was less impacted by rising US yields, given the shorter duration in the EM corporate bond market. Investment grade credits slightly outperformed high yield names. Renewed weakness in the China property sector was a drag on returns in May, but the index spread widened only marginally in the month, rising to 347 bps.

Multi-Asset Credit

NCRAM’s Multi-Asset Credit Strategy posted a small gain in May. Our low risk posture, overweight to European high yield, credit selection, and tactical duration management were positive contributors. We view the resolution of the debt ceiling issue as a short-term positive, avoiding a technical default in the US, but as a long-term negative given the prospective fiscal tightening required to strike a deal.

Disclosures

This document is prepared by Nomura Corporate Research and Asset Management Inc. (NCRAM) and distributed by Nomura Asset Management Europe KVG mbH and is for informational purposes only.

All information contained in this document 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.

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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.

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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.

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