High yield bonds have been resilient throughout the market turmoil caused by the coronavirus pandemic.
WHAT YOU NEED TO KNOW
- High yield bond markets have neither suffered from the illiquidity nor were overwhelmed by sharp increase in fallen angels that many investors feared, owing largely to comprehensive support from central banks.
- We believe European high yield bonds are attractively priced and that the European Central Bank (ECB) will remain committed to supporting the market.
- A diversified approach comprises a range of issuers, industry sectors and credit ratings in order to reduce the impact of any defaults on overall performance.
The first half of 2020 has been a challenging period for investors. The global COVID-19 pandemic brought severe stress to financial markets, with global equities falling by around 35%* (peak to trough) in just six weeks. Credit markets were also affected and high yield (HY) bonds fell by around 20%* (peak to trough) over the same period.
Credit spreads (the difference in yield between corporate and government bonds) have regained 70–90%* of the widening that occurred earlier in the year. Notably, investor fears during the correction around fallen angels and illiquidity did not materialise, and corporate bond markets have continued to function reasonably well.
CREDIT MARKETS STRESS WAS SHORT-LIVED
Fallen angels are companies the rating agencies have downgraded from investment grade (IG) to HY. Most years some companies will migrate from IG to HY, while others, known as rising stars, will shift from HY to IG. Typically, these two movements will cancel each other out therefore there is not a net migration between the IG and HY.
The HY market can expand suddenly in size when the number of fallen angels exceeds the number of rising stars. This situation has happened over the first half of 2020, which raises questions about whether there will be sufficient demand from investors for these bonds. If there isn’t then HY bond prices are likely to fall owing to the additional supply.
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Group Chief Investment Officer
* Source: Bloomberg
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