Search this website. You can use fund codes to locate specific funds

Weekly credit insight

Chart of the week: which sectors offer the best potential for upside capture?

Global high yield has delivered almost 16% since the start of 2019 and investors are increasingly asking where the next leg of capital appreciation will come from. The sell-off in Q4 2018, easier monetary policy, improved fundamentals and strong demand for spread products have all resulted in outstanding performance from credit markets over the past 13 months.

This has caused a large part of the market to trade above the level at which the company is able to call bonds in the near term. One solution could be to reach further down the ratings spectrum, but in our view the macroeconomic environment is not good enough to justify this – especially given the disruptions caused by the coronavirus epidemic.

Figure 1 shows the share of high-yield bonds in each sector that are trading above their near-term call price.1 While roughly 50% of bonds in the services and consumer-goods sectors are trading above this level, the number is less than 20% in banking and energy.

Figure 1. Bonds trading above their near-term call price

Source: Federated Hermes, as at January 2020.

To capture any further upside, investors need to look for opportunities in sectors that inhabit the right-hand side of the chart. The current state of affairs means that there is very strong demand for the capital instruments of banks in both primary and secondary markets – which is confirmed by the outperformance of additional tier-one instruments this year.

There is also likely to be more refinancing supply in sectors like healthcare and retail, where a higher share of bonds are trading above their 2020 call price. In this environment, it is more important than ever to combine a top-down and bottom-up look at the credit spectrum in order to identify the parts of the market that offer the best risk-adjusted returns.

More Insights

Central bank digital currency: clean atomic monetary energy or financial fallout risk?
Fiorino delves into the emerging field of central bank digital currencies
Credit Pulse: market update – 17 September 2021
In our latest Credit Pulse, we take a deep-dive into credit fundamentals and findings from our credit strategy meetings.
Impact Annual Report, 2020
Covid-19 has resulted in a paradigm shift: it has thrown into sharp focus the need for resilient healthcare systems and supply chains, while also highlighting the climate change crisis and workers’ rights issues.
SDG Engagement Equity: 2021 H1 Report
What engagement progress did we achieve during the first six months of 2021?
How to unlock opportunities in the sponsor-less SME loan market
With greater liquidity and mounting interest from institutional investors, can we expect an influx of non-sponsor transactions funded by direct lenders?
Increasing transparency through disclosure
Kate Fowler, senior responsibility analyst, explores the potential impact of the new Sustainable Finance Disclosures Regulation.