In this video update, Tom Ross, corporate credit portfolio manager, looks at the high yield bond market, exploring how technical conditions, dispersion among credits and blurred lines in valuations are creating opportunities.

Key takeaways:

  • Technical conditions remain supportive, with limited new issuance yet strong investor demand. Negative interest rates, notably in Europe and Japan, are encouraging a reach for yield are making European bonds even more attractive for US dollar-based investors after accounting for currency hedging.
  • Dispersion has risen across high yield markets, providing more opportunities for active managers to exploit. Valuations within different credit rating bands have become more varied across regions
  • Blurred lines in valuations, particularly around the cross-over space between investment grade and high yield means it is possible to identify mispriced opportunities, including rising stars and investment grade bonds trading with more attractive yields and prospects than some high yield bonds.

Notes:  

In the video Tom refers to credit ratings, which are scores assigned to bonds or issuers according to their creditworthiness by credit rating agencies. Bonds rated BBB which is an investment grade rating, are deemed to have a higher (better) credit rating than bonds rated BB which is a sub-investment grade (or high yield) rating, which are in turn deemed better than bonds rated B. 

References to BB and B indices refer to the ICE BofAML US High Yield B Index, the ICE BofAML US High Yield BB Index, the ICE BofAML European Currency High Yield B Index and the ICE BofAML European Currency High Yield BB Index and the LIBOR option-adjusted spread (OAS). Spread differentials were correct at end September 2019 but may vary over time. 

The reference to global high yield tights relates to the lowest recent spread on the ICE BofAML Global High Yield Index which was 295 basis points in January 2018 on a LIBOR OAS basis. 

References to Volkswagen and AroundTown relate to the AroundTown SA 4.75% FIX/FRN perpetual subordinated bond and the Volkswagen International Finance NV 4.625% FIX/FRN perpetual subordinated bond. Yields mentioned were correct at end September 2019 but may vary over time. 

Crossover relates to bonds with ratings close to the border between investment grade and high yield. Rising stars are bonds/issuers that are upgraded in terms of credit rating from high yield to investment grade.