Marktkommentar I High Yield Monthly Update
High Yield Update – Views from our High Yield investment boutique, NCRAM
September 1, 2022
David Crall, CFA
CEO and CIO, Nomura Corporate Research and Asset Management Inc.
US High Yield
The US high yield market dropped -2.39% in August, bringing the YTD return to -11.03%, as measured by the ICE BofA US High Yield Constrained Index (HUC0). Early August saw a continuation of the July rally, which was based on the idea that inflation was falling even as growth was better than expected, leading to market expectations for a Fed pause in late 2022 and rate cuts in 2023. However, various Fed speakers seemed uneasy with the bullish sentiment and easier financial conditions, and throughout August tried to communicate a hawkish vigilance against inflation, culminating in Chair Powell’s speech on August 26th. Their emphasis was that premature easing might allow inflation to become entrenched, a mistake they hoped to avoid. Accordingly, the market has priced in “higher for longer,” and the 5-year Treasury backed up 67 bps on the month. The forward looking implied policy curve no longer expects cuts in 2023. The other key aspects of the economic backdrop seem intact – i.e. growth remains slow but resilient and inflation is clearly moderating – but expectations for tighter Fed policy repriced all markets in the month as the dollar rose, Treasuries fell, and risk markets retrenched.
In this environment, CCCs outperformed in August as growth fears, which peaked in June, continued to abate. Energy and other commodities, Capital Goods, and Leisure were the best performing sectors, while Healthcare, Cable, and Broadcasting were the weakest sectors. The US high yield market ended the month with a yield of 8.47% and a spread of 505. Looking forward, we continue to believe that US inflation will fall significantly in the coming months, as commodities have fallen, the semi-conductor shortage and other bottlenecks are easing, and housing, tech, and other frothy sectors are slowing down. Accordingly, we are hopeful that we have seen “peak hawkishness” from the Fed, and that a combination of slower inflation and slower growth will allow them to pause raising rates near the end of 2022. At the same time, we believe that the US will experience either slow growth or a mild recession, avoiding worse outcomes, as sectors like energy, travel and autos may continue to grow. We believe defaults in high yield will stay below historical averages, and that the overall high yield market has an attractive return for the risk today.
Global High Yield
The European high yield market also gave back some of its July rally, returning -1.22% and bringing the YTD return to -11.76%, according to the ICE BofA European Currency High Yield Constrained Index (HPC0) in local currency terms. The rally had continued through the first half of the month, driven by respectable earnings, some signs of better inflation data, and a general view that central banks may be able to engineer a soft landing and be in a position to slow down their tightening sooner than previously feared. However, as the month wore on, the combination of tighter valuations and renewed weakness in the rates market began to weigh on the asset class. The 10-year Bund yield, which had ended July at 0.81%, ended August at 1.54%. Concerns of stagflation in Europe given the pricing and availability of energy supplies particularly hurt sentiment in European high yield. In this environment, BBs underperformed, which helped our portfolio’s relative performance. Additionally, security selection in Support Services and Wholesale Food helped performance.
Emerging markets hard currency sovereign bonds declined -1.17% in August, as measured by the JPMorgan Emerging Markets Bond Index Global (EMBIG). The index spread actually tightened 24 bps to 422 bps over US Treasuries, indicating that most of the negative return came from US Treasuries. Investment grade sovereign credits, which make up about 60% of the EMBIG index, underperformed due to Treasury sensitivity. High yield sovereign credits started the month with a strong rally, but reversed by the end of the month on the general risk-off tone in other credit markets, a stronger USD, and higher US yields. With this move, average high yield sovereign yields increased to 11.8%, not far from the 13% levels seen in mid-July. Our EM sovereign strategy underperformed its index in the month as we had added back duration on the assumption that US inflation had already peaked. EM high yield corporates outperformed US high yield in August with a +0.80% return, as measured by the ICE BofA High Yield US Emerging Markets Corporate Plus Index (EMUH), supported by positive returns in Asia HY and strong performance in some Eastern European and Latin American credits.
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.
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