#HighYield – Research Highlights
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#HighYield
On the 4th of January, Columbia Threadneedle Investments published a new edition of their monthly report “In Credit”, this time titled as: “Here we go again”. Speaking about High Yield, Columbia Threadneedle states that technical values remain positive for the asset class, however, there was a small outflow of cash out of high yield ETF’s.
One of the major events that impacted this asset class last year, was the large inflow of so-called ‘fallen angels’. These ‘fallen angels’ increased the size of the high yield universe by 35% on a year basis with more than 70 billion dollars in additional high yield debt.
Columbia Threadneedle Investments holds a neutral view towards high yield, stating that spreads are currently inside long-term averages and that conditions for accessing financing have drastically improved. Some risks that Columbia mentions are a prolonged slump due to COVID-19 restrictions and the effect policy, vaccines, positive technical, and economy recovery have on spreads.
In a recent paper by T. Rowe Price called: “Uncovering Opportunities in Noninvestment-Grade Credit” , they discuss some aspects of high yield credit and bank loans. T. Rowe Price found that the high yield bond market is much larger in the U.S. than in Europe. The average credit quality is the same for both the U.S. and the European high yield market. However, the U.S. market is for a larger part made up out of energy-related issuers which historically have given Europe a slight quality advantage.
Due to the pandemic the earlier mentioned fallen angels have improved the average credit rating within the high yield space. T. Rowe Price states that, even though they see the risks of the heightened credit risk and liquidity conditions, they see some opportunities in European high yield bonds in out of favour industries related to travel and transportation and some U.S. price dislocated fallen angels.
Finally, in a paper by Capital Group named: “Elections and a vaccine: Implications for fixed income investors” the near future for bonds is discussed. Capital Group has a modestly optimistic view on credit. In a multi-asset portfolio Capital Group advocates for U.S. high yield, as these issuers are more exposed to the domestic economy and these companies generally have a higher level of leverage which should benefit from a recovery.
Furthermore, Capital Group states that we may be at the beginning of a deleveraging cycle. A phenomenon which historically has been supportive of credit assets.
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