Marktkommentar I High Yield Monthly Update

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

May 3, 2022

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

US High Yield

The US High Yield market dropped -3.63% in April, bringing YTD performance to -7.96%, as measured by the ICE BofA US High Yield Constrained Index (HUC0). As the market declined on the month, yields for the market overall increased by 102 bps to 7.06%, and high yield spreads widened by 54 bps, rising to 398 bps. The sell-off was broad based, and the ratings categories performed similarly, with BBs down -3.66%, Bs down -3.37% and CCCs down -4.02%. The Gaming, Leisure, Steel, and Transportation sectors fell less than the market, while Cable, Healthcare, and Building Materials underperformed.

The primary driver of the correction was the escalating hawkishness of the Fed. The Fed is increasingly concerned about inflation becoming entrenched, and they are eager to bring Fed policy back to a neutral level. At the beginning of the month, the Fed was expected to raise rates eight additional times in 2022, and now the market expects the equivalent of 10 additional increases. Furthermore, the Fed has guided to multiple 50 bps increases, with the possibility of a 75 bps increase, and they are expected to begin balance sheet run-off, also known as quantitative tightening, in June, with a three-month ramp to $95 billion per month. This increasingly hawkish guidance from the Fed has caused price pressure across the fixed income markets, and the 5-year Treasury yield increased from 2.46% to 2.96% on the month while the 10-year Treasury increased from 2.34% to 2.94%. For the year to date, the 5-year Treasury yield is up 170 bps and the 10-year Treasury yield is up 143 bps.

Even as Treasury yields increase, the market is wondering if the economy may slow in later 2022 or 2023. So far, final demand appears generally intact. Companies have reported that lower income consumers are trading down in the face of price increases, but other parts of the economy are still benefiting from the momentum and wealth creation of the past few years. The housing sector, while usually sensitive to higher interest rates, is reporting that there is still an excess of demand compared to supply. Most companies have passed on cost increases, leading to solid corporate profitability. However, the Fed feels the necessity of slowing the economy to some degree, so the market is beginning to ponder that on the horizon. At the same time, the Russian war and China’s Covid lockdowns are both increasing inflation and reducing economic growth, and therefore contributing to the bearish tone in the market.

After the sell-off, much of this concern is priced into the high yield market. As high yield bond prices fall, their convexity improves, and lower dollar prices can offer an attractive risk/reward. Furthermore, we do not expect a significant increase in default rates, so the yields look increasingly attractive for a well-constructed portfolio. As always, we will do our best to navigate the markets carefully.


Global High Yield

The European high yield market continued to trade poorly in April. The ICE BofA European Currency High Yield Constrained Index (HPC0) lost -2.78% in April and is down -7.32% YTD in local currency terms. High inflation, signs of an increasingly hawkish ECB, along with the Fed, and concerns about a growth slowdown all weighed on the market. While some optimism about a potential ceasefire in Ukraine had triggered a recovery in late March, it is now clear that the conflict is likely to drag on for some time, with implications for both commodity cost inflation and commodity access. Late in the month, Russia cut off gas shipments to Poland and Bulgaria. While many European countries are working hard to secure alternative sources of supply, the higher prices and uncertainty of supply from Russia are clear negatives for European growth. Rising inflation and the associated likely policy response have caused a historic increase in yields, with the 10-yr Bund yield rising to 0.94% at month end, from 0.55% at the end of March and -0.18% at the end of 2021, pressuring all of European fixed income. While BBs continued to perform poorly in this environment, Bs began to underperform later in the month as concerns shifted to growth fears and market liquidity deteriorated.

Emerging markets (EM) hard currency sovereign bonds, as measured by the JPMorgan Emerging Markets Bond Index Global Index (EMBIG), posted a -5.48% decline in April, accumulating a -14.23% loss year-to-date. Continuing market re-pricing of Fed tightening in light of inflationary pressures was the main market driver for EM fixed income in April. The EMBIG spread to maturity widened 32 bps in April to 379 bps over US Treasuries, most of it coming from high yield credits, which widened 50 bps, compared to 14 bps widening in investment grade credits. Our long-standing underweight duration stance, tilt to high yield credits, and higher-than-average cash balance allowed our EM sovereign strategy to outperform its benchmark on a relative basis in April.

EM high yield corporate bonds, as measured by the ICE BofA High Yield US Emerging Markets Corporate Plus Index (EMUH), declined -2.56% in April (-12.47% YTD), outperforming EM sovereigns and US high yield on the back of recovery in some Chinese property and European credits that outperformed. With the price action in April, the EMUH index spread to worst ended at 651 bps over US Treasuries, or about 230 bps wide to US high yield credits. Credit selection in China, our underweight duration stance, and higher-than-usual cash balances allowed our EM corporate debt strategy to outperform the index in relative terms in April.


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.
This document is intended for the use of the person to whom it is delivered. Neither this document nor any part hereof may be reproduced, transmitted or redistributed without the prior written authorization of NCRAM. Further, this document is not to be construed as investment advice, or as an offer to buy or sell any security, or the solicitation of an offer to buy or sell any security. Any reproduction, transmittal or redistribution of its contents may constitute a violation of the U.S. federal securities laws.
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.
An investment in high yield instruments involves special considerations and certain risks, including risk of default and price volatility, and such securities are regarded as being predominantly speculative as to the issuer’s ability to make payments of principal and interest.
A copy of NCRAM’s Code of Ethics and its Part 2A of Form ADV, are available upon request by contacting NCRAM’s Chief Compliance Officer via e-mail at Compliance@nomura-asset.com or via postal mail request at Nomura Corporate Research and Asset Management Inc., Worldwide Plaza, 309 West 49th Street, Compliance Department, 19th Floor, Attn: Chief Compliance Officer, New York, NY 10019-7316.
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.
This document is for information purposes only. The evaluations presented in this document are based on information from various sources which are considered to be trustworthy by Nomura Asset Management Europe KVG mbH (collectively with other group companies „Nomura“). No guarantee is given in relation to the accuracy, completeness or currentness of the information, calculations and forecasts. Nomura does not accept liability for any loss, damage, cost or expense resulting from the use of or reliance on the document or other written or verbal notices and information by the recipient, including his/her executive bodies, employees, advisors or representatives or other entities. All forecasts and calculations (or statistical evaluations) are for explanatory purposes only. They are dependent upon evaluations, models and historical data, as well as interpretation by Nomura. The forecasts and calculations are based on subjective estimates and assumptions and do not constitute a prediction of future developments, and should not be construed to mean that the occurrence of one possible future result is more likely than the occurrence of another possible future result.
The content of this document is considered as minor non-monetary benefit in the meaning of MiFID II and not to be construed as legal, business or tax advice or as a recommendation of any kind. Distribution and duplication, even in parts for the purpose of forwarding the information to third parties is only permitted after obtaining the prior consent of Nomura Asset Management Europe KVG mbH.
Performance in the past is no guarantee of future success. The opinions of and statements from Nomura contained in this document represent the current assessment at the time of publication and may change at any time without advance notice.