Global High Yield Bonds

European high yield supply has endured its weakest start to a year in over a decade. The total supply to May 13th equalled €12.89bn, a fall of 75% year on year, with the market effectively closed for a large portion of the year.

As inflation continues to outstay its welcome in the global economy, we have previously discussed the impact of rising input costs on corporates and how crucial pricing power can be in such a challenging environment.

The vast majority of the high yield universe used the attractive funding conditions last year to term out their maturity profiles. In fact, 2022 maturities in both US and European high yield equate to just 1% of their respective indices.

The broad-based sell-off that has faced investors since the start of this year has been all the more painful because of the breakdown in traditional correlations, which has put conventional hiding places out of reach.

So far, most fixed income asset classes have experienced a tumultuous 2022. With high yield markets bucking the trend in recent weeks, George Curtis takes a closer look at the drivers of the sector’s recent strength and its current opportunity set.

Growth in 2022 is likely to be above historical averages for most developed economies, even after adjusting forecasts for the impact of the Russian invasion.

Soaring inflation was already a dominant theme for markets coming into 2022. The sanctions imposed on Russia in response to its invasion of Ukraine have only exacerbated its expected rise, and pushed its expected peak further out.

Default rate estimations depend on how you define defaults and what index you use, but there is no doubt we are at record lows in European high yield at the moment.

European bank equity has been among the hardest hit sectors since Russia’s invasion of Ukraine, as fears of losses and a flight to quality have prompted investors to change positioning.

Escalating geopolitical tensions have contributed to a volatile past week for investors, but uncertainty regarding central bank action continues to dominate the bond markets, with one investment bank now predicting nine straight hikes from the Fed beginning at its March meeting.  

So far this year, the spread between two-year and 10-year US Treasury yields has declined from 77bp to 51bp.

As 2021 wore on we became increasingly concerned that the disconnect between asset prices, economic fundamentals and monetary policy was becoming more acute.