High Yield: Coronavirus market volatility - performance update
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High Yield: Coronavirus market volatility – performance update

The outlook for economic growth has dramatically worsened over the past week as Covid-19 fears have taken hold. On the back of this, earnings expectations and the macro outlook have also materially deteriorated. This increased uncertainty is reflected in risk market pricing, including high yield.

Specifically, European high yield strategy spreads have widened by more than 300 basis points since the end of February (see Figure 1):

Figure 1: European high yield spreads

Source: ICE BofAML indices, as at 17 March 2020

Figure 2 below, meanwhile, shows the year-to-date basis spreads. Macro fundamentals are pointing to the likelihood of a negative growth impact from Covid-19. While corporate balance sheets are reasonably well positioned, future earnings are uncertain given the knock-on effect of the virus. Outflows for US high yield strategies have increased in recent weeks, with last week posting a $5.1 billion outflow, the largest for the asset class since early 2017, following $4.2 billion the previous week.

Figure 2: Changes in European high yield spreads in 2020

Market
16/03/2020
31/12/2019
Change bps
Change %
2020 observations
Europe
740
329
411
125%
Europe outperforming
BB
544
215
329
153%
High quality credit underperforming
B
1079
434
645
149%
High quality credit underperforming
CCC
1409
895
514
57%
Lower quality credit outperforming
USA
838
360
478
133%
US underperforming
BB
616
202
414
205%
High quality credit underperforming
B
917
356
561
158%
High quality credit underperforming
CCC
1620
1008
612
61%
Lower quality credit outperforming
Energy
1921
673
1248
185%
Energy underperforming

Source: ICE of BofAML indices, 17 March 2020.

In European high yield, last week’s outflow was around €2 billion, of which €760,000 was in ETFs. The new issuance market has also come to a halt. Still, as active managers we continue to see some potential “pearls in the rubble” as certain sectors and names, which earlier were deemed “expensive” given their tight spreads, now start to look interesting as valuations have become more attractive.

Since the start of the year the portfolio has been moderately underweight market beta and maintains on a sector basis an underweight in cyclicals such as autos, transportation and basic industries, while it is overweight in healthcare, technology, media and financial services. Recent activity includes raising cash through the sale of some short-dated maturities, which had performed well and were starting to look expensive, in case of short-term liquidity needs. We also reduced holdings in some names in the transport, energy and leisure-related sectors.

We expect further disruptions to come due to the coronavirus situation and its ramifications. The most recent few trading days have shown that the market is highly stressed and showing signs of disruption. The wider markets are now driven by the shock to the real economy and by political decisions in response. This is moving the market into unchartered territory and making it difficult to assess. What had started initially as a typical sell-off where weaker credits sold-off heavier than stronger credits, has now developed into a more indiscriminate sell-off across all sectors and all rating classes within high yield. Sectors which normally are relatively stable, e.g. leisure parks, are now experiencing a structural shock for which it is hard to say how long it will take for the recovery. Given how indiscriminate the recent sell-off has been, it is a challenging environment which will remain highly volatile and uncertain as things can change very quickly.

20 Março 2020
Roman Gaiser
Roman Gaiser
Head of High Yield, EMEA
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High Yield: Coronavirus market volatility – performance update

Informação importante

A pesquisa e análise incluídas neste site foram produzidas pela Columbia Threadneedle Investments para suas próprias atividades de gerenciamento de investimentos, podem ter sido realizadas antes da publicação e são disponibilizadas aqui aliás. Quaisquer opiniões expressas são feitas na data da publicação, mas estão sujeitas a alterações sem aviso prévio e não devem ser vistas como conselhos de investimento. As informações obtidas de fontes externas são consideradas confiáveis, mas sua precisão ou integridade não pode ser garantida.

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