High Yield Bonds

Our base case is for a continuation of quite high growth and a modest inflation overshoot. For bond investors, positioning for stagflation could be a dangerous trade if that base case bears out

Despite the impressive returns of Euro HY over the last year or so, the backdrop for the asset class continues to suggest there is more upside to come.

This supply surge can be very welcome for those investors with cash to put to work, though it is also eyed with caution.

It is quite rare that we recommend playing in the very bottom of the credit spectrum because CCC rated bonds are where at least 95% of all defaults come from, and are significantly more volatile than we would like.

Doing the necessary work to understand the difference between companies merely exposed to COVID restrictions and those structurally damaged by them continues to be extremely important.

All told, while we think relative value in WBS can be attractive, we believe the trend of refinancing in the bond market is only going to continue in the coming years, though it will be gradual.

Last week there was a rare occurrence in the high yield market as German airline Lufthansa announced it would be deferring the coupon on a hybrid bond issued in 2015.

Primary deals launched in the European high yield market over the last two weeks have been diverse, and at times opportunistic.

The last few weeks has seen healthy issuance in the high yield space, including multiple billion pound deals, the most recent of which, Asda, priced on Wednesday. This was an interesting deal for a few reasons, not least because it is the largest sterling high yield deal of all time

Ultimately, the fact that the Klockner deal is not marketed as a green loan but still includes ESG-related covenants is proof that ESG needs to be integrated into an investor’s credit work as a matter of course, something we have been arguing for years.

We think it is indeed time to begin the search for recovery stories and deleveraging credits in sectors where the execution strategy is likely to succeed.

We think this current pause in the global rally is healthy and gives investors a rare moment to reassess, but from a fixed income credit point of view we would not expect too much of a dip.