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

Weekly Credit Insight

Chart of the week: high-yield credit should remain an asset class of choice

As markets sold off in March, investors were forced to sell what they could. This created dislocations in the market, as large, liquid capital structures underperformed, the synthetic market outperformed bonds and credit curves inverted.

In addition, investment-grade credit underperformed the high-yield market. At some points, the spread ratio of high yield over investment grade traded two standard deviations below its recent historical average (see figure 1).This was driven in part by the growth of the investment-grade market relative to high yield, particularly the BBB-rated segment.

Figure 1. Investment grade moves from cheap to rich

Source: Federated Hermes, ICE Bond Indices, as at July 2020.

As a record amount of fallen angels were downgraded to high-yield status, the Federal Reserve came to the rescue and announced support for this part of the market. At the same time, numerous indicators suggest that the broader market is normalising, while central-bank easing has prompted a convergence between the US and the rest of the world.

Demand for investment-grade credit has recovered and the spread of high yield over investment grade has risen to two standard deviations above its recent historical average, meaning that high yield now looks better value. As investors choose to remain in the senior part of capital structures, high-yield credit should remain in favour – a dynamic that is also supported by central-bank support, the mandatory nature of coupons and fact that the high-yield market has the highest average credit rating on record.  

More Insights

SDG Engagement Equity commentary: Brunswick
We demonstrate how we are engaging with Brunswick to create positive impacts on society.
Weekly Credit Insight
US and European credit-market performance diverged significantly in July.
Monthly Fund Commentary, June 2020
Please read on for more information and a summary of performance, activity and our investment outlook, from our Portfolio Managers.
360°: credit investing in the coronavirus era
What is our current view of fixed-income markets? And where do we see the best relative value?
Credit: Industry Insights
Filippo Alloatti, Senior Credit Analyst, shares his views on financials.
Fiorino: why bank debt investors should care about MDA
Increasingly, the Maximum Distributable Amount is a key metric that bank debt investors need to keep an eye on.