Marktkommentar I High Yield Monthly Update
High Yield Update – Views from our High Yield investment boutique, NCRAM
Published June 1, 2021
David Crall, CEO and CIO, Nomura Corporate Research and Asset Management Inc.
US High Yield
The US high yield market returned 0.29% in May, bringing the YTD return to 2.31% as measured by the ICE BofA US High Yield Constrained Index (HUC0). During the month, positive economic trends led CCC-rated issuers to continue their outperformance over higher-rated issuers. The best performing sectors included Energy, Consumer Goods, Transportation, and Leisure. The worst performing sectors were Healthcare, Utilities, Telecom, and Technology. Spreads were roughly unchanged on the month, and the US high yield market ended May with a yield-to-worst of 4.16% and an option-adjusted spread of 335 bps.
Thanks to vaccinations, Covid is in steady decline in the US, and re-opening is moving ahead vigorously. Many economic metrics, such as the services PMIs, are at record highs. At the same time, there are numerous signs of bottlenecks, labor shortages, and supplier delays. With demand exceeding supply in many products and services, prices are going up, and the core CPI at 0.9% in April brings the last three months to over 5% at an annualized rate. The path of inflation going forward has become a key consideration. To some degree, bottlenecks will be addressed, and many unemployed people are expected to go back to work in the fall, encouraging inflation to normalize. However, the prospect that inflation could persist is a risk to be monitored.
With the acceleration in inflation, US Treasury yields have barely budged in the last two months. The Fed has indicated that they don’t mind some increase in inflation, and they furthermore view the re-opening inflation as transitory. In the meantime, pricing power supports corporate earnings and suppresses default rates. Defaults in the US high yield market have been running at less than 0.5% annualized YTD, and there are no signs of a change in that trend in the near term. The combination of low defaults, a dovish Fed, and a stable Treasury market supported high yield in May and should continue to do so going forward. The market reaction to a potential Fed taper in 2022 probably remains the biggest question.
Global High Yield
The European high yield market was stable in May, returning 0.20% in local currency terms, bringing returns to 2.44% YTD, according to the ICE BofA European Currency High Yield Constrained Index (HPC0). The market has been supported by the recent pick-up in Covid vaccination rates and the significant reduction in new cases across much of Europe. Economic activity was resilient through the difficult winter months and has begun picking up meaningfully as countries increase the pace of re-openings into the summer. However, the combination of less compelling valuations and very high new issue volumes was a headwind to market returns. Furthermore, as the economic recovery has taken hold and inflation becomes an increasing concern, 10-year Bund yields have risen from -0.55% in January to a high of -0.10% in late May, causing a modest headwind for long-duration, low-coupon bonds. Our portfolios’ performance continues to be driven by security selection and ratings allocation.
Emerging market (EM) hard currency sovereign bonds, as measured by the JPMorgan Emerging Markets Bond Index Global (EMBIG), posted a +1.08% return in May (-1.87% YTD) helped by supportive commodity prices and continuing stability in US Treasury yields despite higher inflation data in the US. The EMBIG benchmark ended May with a spread to maturity of 307 bps over US Treasuries, although the high yield segment of the index hovered around 570 bps, about the past ten-year average. Emerging market high yield corporate bonds, as measured by the ICE BofA High Yield US Emerging Markets Corporate Plus Index (EMUH), gained +0.98% in May (+1.28% YTD). After reaching almost 200 bps wide to US high yield in mid-April, the EMUH index tightened to around 170 bps at the end of May. The largest credits in the index outperformed the market while performance in other large issuers was more mixed. Credit selection was the main source of alpha for our EM corporate debt strategy in May, as overweight exposure in some Latin American credits that outperformed the market and underweight exposure in some credit problems primarily in Asia contributed positively to returns, despite a neutral stance on duration.
This commentary was 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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