A year ago both markets and corporates entered a period of turmoil, as both the oil shock and covid-19 crisis erupted at the same time. Since then, with the help of central banks and governments, the corporate world has significantly recovered from the depths of the crisis.
One way to assess the expected idiosyncratic volatility for individual companies is to look at dispersion (in our case we look at the share of the market trading within +/- 100bps from the average). We can see from the chart below that all high yield markets have recovered back to pre-crisis levels.
What are the implications for investors this year? To start, it increases the importance of security selection – whether its optimising the right duration exposure by utilising the CDS market or making sure to maximise the total return of a security by choosing the optimal roll-down. At the same time, against a backdrop of rising rates and a difference in the maturity of the cycle between regions (for example, US versus Europe) it is key to be able to approach credit from a global perspective, paying particular attention to the geographical and currency exposure.
Source: Federated Hermes, Bloomberg. Past performance is not a guide to future performance.