The amount of negative-yielding debt is nearing an all-time high (see figure 1). It is no surprise that credit has received increased attention from investors, resulting in record new issuance this year and growth in the high-yield market across regions.
Figure 1. Negative-yielding debt: on the rise again
Source: Bloomberg, as at October 2020.
The largest driver for credit this year has been the convergence between US rates and those in Germany and Japan, as the decline in economic activity and liquidity freeze forced the Federal Reserve to increase support for fixed income and remove much of the risk premia from the market.
The widening in spreads earlier this year initially resulted in a fall in the value of negative-yielding debt. The stock has since risen, boosted by the credit-market recovery, increase in savings and long-term reallocation to fixed income as the global population ages. The mandatory nature of credit’s coupons is also attractive at a time when equity income is in doubt, while the asset class is higher up in the capital structure than equities.
Dispersion in performance between single names mean there is plenty of opportunity to make both top-down and bottom-up calls in the current environment, something we discuss in the second instalment of our recent two-part Delta podcast episode.