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Delta: sub-zero high yield

Dovish comments from European Central Bank (ECB) President Mario Draghi sent another jolt through fixed income markets last month and pushed more bonds into sub-zero yield territory. But what is it like to operate in a negative-yield environment?

The universe of negative-yielding bonds hit a record $14tn after the ECB hinted that it could resume its corporate bond-buying programme last month.

In this episode of Delta, Jonathan Lee, Head of Credit Trading, and Fraser Lundie, Head of Credit, join Jacko to discuss negative-yielding assets in the high-yield universe.

“Euro investment-grade credit is having one of the best first half-year performances ever, with a total return of 5.4%. We are seeing this powerful market technical of inflows into euro investment grade, with an average of almost $5bn being put to work every week,” says Lee.

“This is something we have not seen before and far above the €1.5bn a week following the launch of the CSPP in 2016. We have seen for some time now that investment-grade investors are buying BBs and, given this technical back drop, the top end of high yield has compressed into this territory. I think this will continue as central banks are in the driving seat for risk-assets at this point.”

Today, about 2% of the euro high-yield universe is now negative yielding. Against this backdrop, Lundie says to meaningfully impact returns in this environment fund managers must pay “a real attention to detail in the fixed income risk side of things”.

“This can mean pin-pointing the right point of the curve to be on or a dynamic and sensible hedging policy when it comes to the interaction between rates and risks assets.

“Be very prepared to take advantage of bouts of volatility in the market,” he adds.

Tune in to Delta.

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