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

Views from the credit desk: Bullish and Bearish Cases
In our latest Credit Pulse we consider the case for bullishness and bearishness about corporate conditions and the global economy, and suggest ways that credit investors can act on either sentiment.
Looking below the surface: 360°, Q2 2021
What is our current view of fixed income markets? And where do we see the best relative value?
The Circular
The Circular cuts to the heart of the issues that matter in the second ESG quarterly update for 2021...
Infinity and beyond banks: the never-ending battle between old money and big tech
Fiorino examines the tussle between banks and the increasingly belligerent Big Tech sector.
Supporting Business at its Best
Celebrating inspiring stories from UK businesses making a difference
Credit Pulse: market update – 21 May 2021
In this latest dynamic debate in our Credit Pulse series, we ask: What is the bull case for markets versus the bear case? How cautious do investors need to be?