So far, 2020 has provided an unprecedented unfolding of events: credit markets rallied at the turn of the year but suffered a coronavirus-induced drawdown in March as volatility spiked and liquidity conditions deteriorated significantly. While the trajectory of Covid-19 remains uncertain, in the latest episode of our fixed-income podcast Delta, we examined the tumult of 2020 and what might happen going forward.
Indeed, much has happened this year – and as we enter the final quarter of the year, the size of the high-yield market is scaling new heights (see Figure 1) in the US, Europe and Emerging Markets (EM). Having stagnated since 2015, most notably in the developed world, the high-yield market is growing again – and it is quickly offsetting the decline over the past five years.
Figure 1. High yield: hitting new heights Source: ICE Bond Indices, as at October 2020.
So, what is driving this growth? A confluence of factors, but the most impactful has been the record number of companies downgraded from investment-grade to high-yield status. Such companies and their bonds are known as “fallen angels”. However, the influx of fallen angels to the high-yield market so far this year does not reflect some of the doomsday scenarios predicted during the March sell-off. That’s because central banks announced sweeping measures to support credit markets, governments introduced support packages, and corporates responded quickly, thereby stabilising their rating trajectory.
In addition, there is a continued lack of momentum in the leveraged loan market because it no longer benefits from tailwinds associated with rising interest rates. In the last five years, such tailwinds helped the loan market cannibalise some of the issuance from the high-yield market.
Finally, the quick response to shore up liquidity led to elevated issuance this year, particularly in the US market.