Claudio Da Gama Rose, BlueBay Institutional Portfolio Manager, Global Leveraged Finance team, RBC BlueBay Asset Management, discusses the recent headwinds and tailwinds in the current environment and what it means for the global high-yield market.
While markets seem to be concerned most about recent volatility, we believe that these concerns have been calmed somewhat by a reasonable corporate earnings season so far.
Decent earnings season
This year’s first corporate earnings round has been demonstrating that many businesses still enjoy robust profitability, including larger US and European bank issuers. Recent bank earnings releases have given investors a look at how banks have weathered the recent volatility. So far, so good. While they have lost some deposits, it pales in comparison to inflows since the start of the pandemic. Despite such reassuring news, markets always find something to worry about instead.
Headwinds from the US
This brings us to the debate about the US debt ceiling. With tax receipts below expectations, we now assume a crunch point around early July. We believe that a possible volatility spike could eventually help to create opportunities for active fixed-income investors, however, caution is warranted as we are still weeks away from peak drama.
Commercial real estate has caused concern in some, given the changing nature of this market, but these loans are conservatively underwritten and represent a small portion of their loan book. Additionally, while banks increased the level of overall provisioning, this was done mainly to reflect Moody’s higher assessment of a recession probability. When it comes to actual losses, these are only gradually increasing, coming off multi-year lows in net charge-offs.
High-yield technicals remain strong
Shifting gears to technicals, and as far as high yield is concerned, they remain strong. There is a common misconception that the high-yield market is closed for new issuance, and yet that could not be further from the truth. In US high yield, 24 bonds priced at USD18.8 billion in April, compared with a monthly average of USD8.9 billion last year. In Europe, issuance is EUR32 billion YTD with recent deals diversified across sectors and rating categories. This is the first inflow in the past five months and the heaviest inflow since August 2020.
Going global with high yield
In summary, the positive return backdrop of this year so far demonstrates the merits of investing in a high-yielding asset class. We believe that the medium-term valuation argument for our asset class remains in place, with higher yields providing a good cushion to compensate investors for foreseen and unforeseen risks. The starting quality of fundamentals and strong technical factors give us the conviction that the asset class can continue to bounce back this year.