Marktkommentar I High Yield Monthly Update
High Yield Update – Views from our High Yield investment boutique, NCRAM
January 3, 2023
David Crall, CFA
CEO and CIO, Nomura Corporate Research and Asset Management Inc.
US High Yield
The US high yield market was down -0.75% in December, bringing the YTD return to -11.21%, as measured by the ICE BofA US High Yield Constrained Index (HUC0). During the month, the Fed delivered a 50 bps hike as expected, and expectations for the Fed’s terminal rate remained stable around 5%. However, Japan allowed their 10-year government bond rate to move higher, leading to higher yields in US and European government bonds markets, and the yield on the 10-year US Treasury increased 27 bps to 3.88%. Meanwhile, the US economy continues to exhibit signs of a moderate slowdown, so high yield spreads widened by 26 bps, with BBs performing the best. At the same time, China has started to relax Covid restrictions, potentially improving the outlook for global commodities, though China must also grapple with a surge in Covid cases. Among sectors, cyclical sectors including Metals and Chemicals performed the best, thanks to favorable pricing trends and China re-opening, while Cable, Autos, and Leisure lagged on the month. The US high yield market ended the month with a yield to worst of 9.01%, and a spread of 483 bps.
Looking forward, NCRAM believes a yield of roughly 9% provides an attractive entry point for high yield investors. We expect a mild recession during 2023, but we also expect the Fed to pause in Q1, and potential for easing later in the year creates a more favorable investment environment. High yield companies have entered this period with lower leverage and higher credit ratings relative to history, so we expect only a moderate increase in default rates. Lower dollar prices and market technicals are also supportive, and we believe the high yield market could offer a good return in the coming year.
Global High Yield
European high yield was choppy in December after a strong rally in the prior two months, returning -0.65% and bringing the YTD return to -11.42%, according to the ICE BofA European Currency High Yield Constrained Index (HPC0) in local currency terms. European high yield investors continued to grapple with the prospect of ongoing monetary tightening in the face of already slowing economic growth. Earlier in the quarter, attractive valuations and better-than-expected Q3 earnings helped bring investors back to the asset class. Furthermore, the pressure around energy resources has eased as stockpiles are full and the winter has generally been warmer than usual so far. The biggest headwind to the market during December was the move in interest rates as central banks continued to raise rates and pushed a hawkish tone, and the 10-year bund yield rose from 1.93% to 2.57% during the month. The European high yield market was also impacted by a few negative events including a cancelled M&A transaction, though spreads on the month were slightly tighter. The market ended the month with a yield to worst of 7.96%, and a spread of 515 bps.
Emerging markets (EM) hard currency sovereign bonds, posted a +0.38%% return in December, bringing the year-to-date return to -16.45%, as measured by the JPMorgan Emerging Markets Bond Index Global (EMBIG). For the year as a whole, the US Treasury component was the main detractor for the EM sovereign asset class with a -14.33% decline, while spread widening detracted only -2.48%. The EMBIG index ended the month with a 7.77% yield to maturity and a 374 bps spread over US Treasuries. During the year, our EM sovereign strategy benefited from our low exposure to Russia in 1Q22 and our underweight duration exposure for most of the first half of the year, which provided some protection to the portfolio from the rapid rise in interest rates. Late in the year, our EM corporate portfolios have increased exposure to China on signs of re-opening.
Our Multi-Asset Credit strategy posted a modest gain in December as we reduced duration in the first half of the month to take advantage of the rate rally. We have tactically favored short duration, lower risk assets as we navigate the tightening by the Fed and a potential mild recession in 2023.
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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