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Weekly Credit Insight

Chart of the week: Where does spread come from?

Global high yield is now trading at one-year lows of 370 basis points spread over government bonds.

Assuming one buys the global high-yield index, it is interesting to note what you are actually purchasing in terms of compensation for underlying corporate credit risk? If we “slice and dice” by region, rating and sector, a clearer picture emerges. From a regional perspective, EM high-yield that is not at 1-year tights yet accounts for 110 basis points of spread (30% of all spread) with the rest split between US (176bps or 46%) and EU (72bps or 20%).

From a ratings perspective, CCCs (the lowest rating category) now accounts only for 17% of the overall spread (down year-on-year from over 22% in February of 2020). This reflects two key themes. Firstly, a clean-up in the CCC universe through defaults over the past 12 months. Secondly, a strong performance of the CCC segment since the US elections results (global CCCs have returned >17% versus over 8% for the wider market since 1st November 2020.

From a sector perspective, a noteworthy development is the year-on-year reduction in spread contribution from the energy sector and an increase from the real estate sector. With respect to the former, a clean-up in the universe and strong oil resulted in US high-yield energy trading at two-year tights. Some investors chose to express this reflation trade via the sector. On the latter, emerging markets and Chinese real estate in particular, continue to comprise a major part of the global high-yield universe in current market conditions.

Source: Federated Hermes, Bloomberg. Past performance is not a guide to future performance. 

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