Stronger Technicals Build in HY
26 September 2016 by Gary Kirk
As the effects of central bank intervention are felt throughout the fixed income universe, investors who typically focus on low beta products are steadily being forced to consider high yielding securities to increase the aggregate yield of their portfolios. This encroachment of a broader investor base is one of the reasons we favour the European HY sector, with this technical support being further enhanced by a net reduction of high yield bond issuance this year to date (compared to 2015).
Similarly, there are technical factors why we like the relative value exhibited by mezzanine tranches of the CLO sector. CLOs offer investors an efficient route to gaining exposure to the leverage loan market, which benefits from the low interest rate environment created by central bank stimulus. As in the HY capital market sector, the net issuance of leverage loans is also down this year compared to 2015. The latest data compiled by Bloomberg shows that in the year to date EMEA leveraged loan issuance is down 6.7% compared to the same period last year, with the number of transactions around 25% lower. Lower borrowing by European companies obviously has a knock-on effect in the volume of future CLO issuance, thereby strengthening the technical backdrop.
While the credit-metric fundamentals remain essential for portfolio stock selection, it is always encouraging when there is the added technical support, as the European market is currently enjoying. With artificially low base rates helping to keep default rates at attractive levels the appeal of CLOs is clear, and with the current credit spreads significantly wider than their peers in the plain vanilla sector the investor base can only be expected to widen further as the search for yield heightens.
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