The year so far has been marked by jittery nerves on the equity and bond markets. Investors are wary of the consequences of a more serious slowdown in the Chinese economy and falling oil prices. Fears are rising over the weakness of the global economy. So what is the right stance to take on the US High Yield market?
We reiterate our very cautious view of US HY. The fundamentals of high-yield issuers are likely to continuing worsening, due to the following factors:
With 9% yields, US HY valuations remain far more attractive than European HY, with its yields of only 5%. This difference is due in part to: (1) the European universe’s under-exposure to energy sectors; and (2) the higher credit quality of Euro HY issuers. The European HY default rate should stabilise at its current 2% level. On the dollar credit market, we reiterate our cautious stance on HY and are overweighting IG. We prefer solidly profitable, domestic demand-driven sectors.
CFA, Credit Strategy
The recent decoupling of US and European HY bonds finds its rationale in both bottom up and top down factors. Differences in market composition, in particular, played quite a role as the US speculative grade universe is more tilted to lower ratings than the European HY bonds.