28 JUN, 2023
By Anthony Kettle
By Anthony Kettle, Senior BlueBay Portfolio Manager, RBC BlueBay AM
You’ve probably heard the old saying “sell in May and go away,” but we don’t believe that for this summer, this adage can work for high yield. It’s true that there have been some defaults and distressed trades recently, but nothing that has surprised the market. In our view, there continue to be interesting opportunities in high yield.
The US high yield market is too interesting to be ignored, especially when we analyze in detail what has happened recently. In May, retail investors redeemed approximately $2.5 billion from the asset class at a time when the market issued just under $23 billion in new high yield offerings. There’s no need to worry because 75% of this supply was related to refinancing, while loan and bond issuances continue to be repaid and renewed.
In fact, there are only $20 billion of high yield bonds maturing in 2023 and only $53 billion maturing in 2024. Spreads have tightened, and bond supply is low. Some of these upcoming maturities belong to troubled issuers trading at a discount, but it’s a small portion of the market as a whole.
The headwinds are there… but they could decrease.
However, it’s not all good news. We anticipate a continued tightening of financial conditions, which should contribute to an economic slowdown, and we expect a mild recession by the end of 2024. Consequently, we remain vigilant about the long-term effects of tightening credit conditions for our asset class, which historically have been negative for high yield spreads.
We expect a slow and steady increase in default rates rather than a sudden surge, due to the low level of short-term maturities and the absence of a broad troubled sector in the European and US sub-investment-grade credit markets. In May, we witnessed three high yield issuer defaults and the completion of four distressed trades. However, these issuers have been trading at distressed levels throughout the year, so it did not disrupt the market. According to JP Morgan, in 2023, 39% of the issuers that defaulted or engaged in distressed trades had already done so in the past.
An irresistible series of opportunities.
Looking ahead to summer, we believe the path is clear. The supply of high yield and investment-grade bonds will be scarce. Companies with a higher probability of defaulting during the year are already trading as such, and the Federal Reserve is pausing its rate hikes after 15 consecutive months of increases. The opportunity offered by US high yield is too interesting to be ignored. Those who didn’t follow the “sell in May and go away” motto will be glad they stayed invested in high yield.
By Generali Investments