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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.

Disclosures
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.
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