Global High Yield Bonds

We think this current pause in the global rally is healthy and gives investors a rare moment to reassess, but from a fixed income credit point of view we would not expect too much of a dip.

In our view the rationale for the premium is certainly weakening and, of course, we can no longer call it a ‘Brexit’ premium.

For high yield issuers 2021 has started in a similar vein to 2020, with the technical backdrop providing an attractive environment for capital raising.

At the moment CLO spreads are tightening, as they are right across credit. However, we haven’t had any CLO primary deals come to market so far in 2021, so we are operating in a bit of an informational vacuum, at which point these cross-asset class comparisons can be useful.

As we have said many times over the past few months, this cycle is likely to be remembered (among other reasons) as being exceptional for its unprecedented momentum.

In his latest video, George Curtis discusses our views on high yield defaults over the last few months and what he thinks we can expect in 2021

We have now retraced some 90% of the March widening in European high yield (on a spread basis and relative to the January tights), a recovery trend we expect to continue as economies open up and demand bounces back. 

Unlike the past six months, where nearly all new deals performed well in the secondary market, from here on in that is far from guaranteed. Expect winners and losers.

Overall, in our view there may be some temporary volatility ahead which investors can try to sidestep or even take advantage of, but it’s probably not worth trying to be too cute as our medium term outlook is still constructive.

Yesterday we showed that for European investors, what we speculated on back in March has come true; that the bond market did recover its losses far more quickly than equities, as shown below.

A trend of negative ratings migration has historically been a consistent precursor for a pick up in the default rate of publicly rated debt.

With BP slashing its dividend this week, we have now seen 52 of the FTSE 100 companies suspend or cut their dividends this year.