Global credit has been affected this year by lower oil and natural-gas prices. This has led to heightened volatility in the energy sector, as default rates have risen and the number of fallen angels – companies downgraded from investment-grade to high-yield status – has increased.
Our chart of the week looks at the returns of different sectors as a share of the global high-yield benchmark, then plots this against how volatile these returns were on a month-on-month basis (see figure 1). We can see that the energy sector now accounts for almost 20% of ex-ante volatility in the global high-yield universe, as measured by duration times spread. The telecommunications industry comes second, at 11% of the total. Energy is also the largest sector in notional terms, accounting for 11% of the global benchmark.
Figure 1: High-yield returns and volatility by sector
Source: Herme Credit, ICE bond indices, as at December 2019.
The composition of the high-yield world is likely to be volatile going forward: more issuers could default, while others may be downgraded from investment grade. The energy sector’s considerable size, its sensitivity to macroeconomic uncertainty and heightened volatility all suggest it will be one of the key drivers of performance next year – much as it was in 2019