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

Weekly Credit Insight

Chart of the week: the strong recovery in the corporate hybrid market echoes the current ‘reach for yield’ environment

In last week’s Weekly Credit Insight, we examined the unequal recovery in the high-yield market owing to higher levels of defaults. In essence, asset allocators are balancing their desire for additional yield with an unwillingness to assume further credit risk during this period of sluggish economic momentum. Indeed, this was evident from the performance of high-yield bonds, which varied depending on an issuer’s credit quality. We can see further evidence of this in the corporate hybrid market1.

Corporate hybrids are mainly issued by large companies with an investment grade rating2 at the senior level. As such, these companies are better placed in the current uncertain circumstances: they have more options available to manage any cash flow hits (such as reducing returns to equity holders or selling assets), and central banks and governments recognise the importance of supporting large companies during these unprecedented times.

In this environment, asset allocators have not moved further down the credit rating spectrum. Instead, they have chosen to move down the capital structure, searching for stronger, higher-rated corporates. In addition, the anchoring of spreads in investment grade corporates, coupled with lower government bond volatility owing to support from central banks, is encouraging investors to consider corporate hybrids. Consequently, this segment of the market has performed well, with average spreads and yields 58 basis points (bps) and 45bps wide of February tights, respectively (see figure 1). What’s more, this is particularly true for US dollar-denominated debt given the convergence between yields in the US and the rest of the world. Against this backdrop, issuers have recognised that a refinancing opportunity exists. Indeed, we’ve witnessed a flurry of new hybrid deals in recent weeks – which no doubt serves as a good warm-up for the high-yield primary pipeline in the coming month.

Figure 1. Global corporate hybrids echo the current ‘reach for yield’ environment

Source: Federated Hermes, ICE Bond Indices, as at 02 September 2020.

  1. 1Corporate hybrid bonds are subordinated debt instruments issued by non-financial companies (which are most investment grade in quality) with equity-like features.
  2. 2To be considered an investment grade issue, the company must be rated at 'BBB' or higher by Standard and Poor's or Moody's.

More Insights

Does the end of China's love affair with property spell heartbreak for investors?
Investors will be profoundly impacted by what the Chinese property sector does next
The Meeting Room Webcast: Global Emerging Markets SMID, November 2021
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.
EV lover, she’ll take your heart because it’s greener: A lifecycle comparison between electric and combustion-engine cars
Road transport is one of the largest contributors to global warming. Its decarbonisation will therefore have a significant impact in the fight against climate change.
Impact Quarterly Report, Q3 2021
In the latest Impact Quarterly Report, we delve into the theme of Financial Inclusion, as a theme linked to 13 of the 17 UN Sustainable Development Goals (SDGs).
An asset class at a crossroads: reshaping credit through ESG
We outline our credit team’s ESG and engagement integration philosophy, and how the team is working to authentically integrate ESG into every step of its investment process.
Climate crisis in focus in EOS’s Q3 Public Engagement Report
In this issue we take a more in-depth look at the climate crisis ahead of COP26.