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

From Buddha to Bagehot: how global banks are keeping the liquidity flowing
If liquidity is the ineffable essence of being for banks, its absence presents an existential threat.
Biodiversity in focus in EOS’s Q3 Public Engagement Report
Why companies need to stop taking nature for granted
Weekly Credit Insight
The interest-rate sensitivity of credit has increased.
The Meeting Room Webcast: Global Emerging Markets, October 2020
As we navigate the ever-changing landscape of the coronavirus, the Global Emerging Markets team reflect on recent performance, and discuss the outlook for Global Emerging Markets from both a market and portfolio positioning perspective.
Global Emerging Markets positive impact case study: Advantech
Through its IoT business, Advantech contributes to the attainment of the SDGs
The red and the blue – updates from the US, October 2020
In this webcast, Clive Selman, moderates a discussion with colleagues Phil Orlando and Steve Chiavarone to hear their thoughts on the US elections and the impact on 2020’s final quarter and beyond.