US High Yield Market Update
- 27 June 2023 (5 min read)
US High Yield Trading Comments (stats as of 6/20/23)
- June has seen a broad-based rally in risk assets (High Yield +1.54%, S&P +5.1%, Russell 2000 Index +6.8%) on the back of a generally positive earnings season, revised inflation expectations with healthier than expected economic releases.
- High Yield (HY) flows turned positive in June after lawmakers found a constructive resolution to the debt ceiling debate in late May with over $3 billion entering the market.
- The primary theme for the last few weeks has been strong compression between the higher and lower quality parts of the market. BB / CCC at a spread of approximately 700bps is at a YTD tight.
- HY continues to benefit technically from upgrades as the most recent, OXY, officially entered the investment grade index at the beginning of June. OXY boosts year-to-date (YTD) rising star volume to $59 billion, exceeding the $1.4 billion of fallen angels YTD.
- Overall trading volumes have waned year-over-year (YOY) but liquidity in the market remains healthy as buyers continue to emerge on any perceived market weakness.
- The primary market has priced approximately $87 billion notional to date, a 30% YOY increase, with the majority of the issuance going towards refinancing opportunities. Most deals stuck on dealer balance sheets from last year have cleared as well, leaving them in a better position to assist with financing. As previously noted, limited net new issuance continues to provide a strong tailwind for HY.
- Federal Reserve policy meetings and subsequent rate decisions remain a key focus for credit markets as do economic indicators tied to inflationary trends and employment data.
US High Yield Research Comments
- We continue to observe relatively solid balance sheets and corporate fundamentals across the overall HY market, and the overall leverage of the market declined in 1Q22 to 3.9x. However, we continue to see diverging HY trends in quarterly results.
- The overall market has begun to see a decline in the average coverage ratio, as expected. This coverage ratio is expected to decline with rising rates and softer cashflows, but we do not expect to see such drastic declines as in other markets across US leveraged finance.
- For context, the HY coverage ratio has remained above 5x in each of the last six quarters having not done since at least 2008 (long-term average excluding last six quarters is 4.35x).
- Moreover, most HY bond issuers have had a lot of time to adjust to this higher rate environment. However, in other credit markets such as leveraged loans, the rise in interest cost is having a more immediate impact on issuers and is leading to more distressed situations.
- While receiving higher coupon payments is rewarding to investors, investors need to be even more cautious in analysing which issuers can manage this increase in interest rates. In addition, investors will need to weigh the decision on the current higher income streams of floating rate markets with less call protection (private debt / loans) vs locking in yields with lower dollar price bonds with better call protection or convexity (HY / IG).
- For the HY bond market specifically, we remain cautious on companies which have a large percentage of loans (i.e., floating rate) exposure in their capital structure. In the HY bond market, only about one-third of companies have loan exposure, which all ties in with why the coverage ratio for HY issuers remains high.
- There appears to be many great opportunities across all credit markets today. Ultimately, we believe the key to success in investing in these credit markets is focusing on companies with a high free cash flow generation that can absorb higher interest rates.
Glossary:
Rising star: high yield bond that has the potential to become an investment grade bond due to improvements in the issuing company’s credit rating.
Fallen angel: Bonds that were investment grade and are now rated as high yield due to a reduction in the issuing company’s credit rating.
References to companies and sector are for illustrative purposes only and should not be viewed as investment recommendations.
Disclaimer
This website is published by AXA Investment Managers Asia Limited (“AXA IM HK”), an entity licensed by the Securities and Futures Commission of Hong Kong (“SFC”), for general circulation and informational purposes only. It does not constitute investment research or financial analysis relating to transactions in financial instruments, nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy, sell or enter into any transactions in respect of any investments, products or services, and should not be considered as solicitation or investment, legal, tax or any other advice, a recommendation for an investment strategy or a personalised recommendation to buy or sell securities under any applicable law or regulation. It has been prepared without taking into account the specific personal circumstances, investment objectives, financial situation, investment knowledge or particular needs of any particular person and may be subject to change at any time without notice. Offering may be made only on the basis of the information disclosed in the relevant offering documents. Please consult independent financial or other professional advisers if you are unsure about any information contained herein.
Due to its simplification, this publication is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee such opinions, estimates and forecasts made will come to pass. Actual results of operations and achievements may differ materially. Data, figures, declarations, analysis, predictions and other information in this publication is provided based on our state of knowledge at the time of creation of this publication. Information herein may be obtained from sources believed to be reliable. AXA IM HK has reasonable belief that such information is accurate, complete and up-to-date. To the maximum extent permitted by law, AXA IM HK, its affiliates, directors, officers or employees take no responsibility for the data provided by third party, including the accuracy of such data. This material does not contain sufficient information to support an investment decision. References to companies (if any) are for illustrative purposes only and should not be viewed as investment recommendations or solicitations.
All investment involves risk, including the loss of capital. The value of investments and the income from them can fluctuate and that past performance is no guarantee of future returns, investors may not get back the amount originally invested. Investors should not make any investment decision based on this material alone.
Some of the services listed on this Website may not be available for offer to retail investors.
This Website has not been reviewed by the SFC. © 2023 AXA Investment Managers. All rights reserved.