Market Commentary I High Yield Monthly Update
High Yield Update – Views from our High Yield investment boutique, NCRAM
July 1, 2024
David Crall, CFA
CEO and CIO, Nomura Corporate Research and Asset Management Inc.
US High Yield
US high yield returned 0.97% in June, bringing the YTD return to 2.62%, according to the ICE BofA US High Yield Constrained Index (HUC0). In recent months, the overall market has tended to track Treasuries relatively closely as spreads have been generally steady in the 320 area. In June, slightly weaker inflation and growth data helped the 5-year Treasury yield fall 14 bps, and this rally supported the high yield market. Inflation data was encouraging for the disinflation thesis, as Core CPE increased only 0.08%. Pockets of weakness have been observed in the US economy, especially among younger, lower income, and lower wealth consumers who have not benefited as much as others from the boom in stock and home prices. The potential for this slowdown to spread nudged up the likelihood of one to two Fed rate cuts later in the year. At the same time, overall growth seems to be on solid footing thanks to industries like healthcare, energy, data centers, and power generation where investment trends remain strong. This backdrop of steady growth has helped keep high yield spreads contained. During the month, CCCs lagged the more Treasury sensitive parts of the market, but remained the best performing ratings category YTD. Cable, Lodging, and Gaming were the best sectors during the month, while Telecom, Homebuilders, and Services lagged. YTD through June, Healthcare, Energy, and Leisure have outperformed while Telecom and Cable have lagged due to secular change and distressed exchanges, and the divergence among the subsectors’ bond performance is quite large. The US high yield market ended June with a yield of 7.94% and spread of 321.
Looking forward, whether growth can remain stable is a key question, along with inflation and whether the Fed can begin to normalize interest rates. Late in the month, Treasuries sold off as President Biden’s poor debate performance was seen as increasing the likelihood of a Trump victory in November, which is viewed as potentially inflationary. While this outcome is a possibility, there are many scenarios surrounding the election, fiscal and monetary policy to consider. In general, we do expect continued disinflation, which should allow for one to two Fed cuts in 2024 and more next year, while the roughly 8% yield on the US high yield market creates a good foundation for an attractive total return.
European High Yield
European high yield returned 0.65% in June and 3.53% for the YTD period (EUR, unhedged), as measured by the ICE BofA European Currency High Yield Constrained Index (HPC0). Spreads widened by 22 bps during the month, as the 5-year bund rallied from 2.7% to 2.6%. During the month, the ECB kicked off their rate cutting cycle by cutting 25 bps and signaling one more cut during 2024, even though inflation is expected to remain above 2% for the intermediate term. Lower rated credit outperformed in June, as valuations for BB credits remained tight and the market continued to search for yield and discount. French issuers sold off during the month as President Macron called for snap elections following a surprise positive showing for Marine Le Pen’s National Rally (RN) party in the European parliament elections. In addition, a potential RN majority was increasingly possible as the opposing far left faction seemed to break away from Macron’s coalition government. However, our base case is that France ends up with a cohabitation government that results in political gridlock, a relatively positive scenario up until the French presidential elections in 2027. Overall, technicals remained positive for European high yield as new issues continued to be well absorbed even though inflows slowed over the last month. The B-and-below maturity wall continues to decrease, which bodes well for forward default rates in the market and overall high yield returns.
Emerging Markets
In June, both EM hard currency sovereign and corporate bonds generated positive returns, supported by the US Treasury rally earlier in the month. EM sovereign bonds gained 0.66% in June (1.84% YTD) despite spreads closing the month 27 bps wider, as measured by the JPMorgan Emerging Markets Bond Index Global (EMBIG). The spread widening was mainly driven by the high yield segment of the market, while investment grade bonds performed in line with US Treasuries. Meanwhile, EM corporate bonds, as measured by the JPMorgan Corporate Emerging Market Bond Index Broad Diversified (CEMBI BD), posted a 0.93% return in June (3.85% YTD), with both investment grade credits and high yield bonds performing similarly. The overall CEMBI BD index spread remained relatively flat, while the real estate segment moderately outperformed other EM corporates on a spread basis. Moderate supply net of amortizations and relative valuations continue to be supportive for EM corporates.
Disclosures
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