In this video Tom Ross, corporate credit portfolio manager at Janus Henderson Investors explains why he believes the credit spread wides of March for high yield bonds are unlikely to be retested.

Key Takeaways

  • Extensive fiscal programmes such as the furlough schemes to support employment, together with central bank support to help companies bridge the gap across the economic shock of COVID-19, have brought confidence back to the high yield bond market.
  • Companies typically offer a higher yield on new bond issues than existing bonds to attract investors, but these new issue premiums have receded or disappeared in recent weeks, increasing the relative attractiveness of the secondary market (bonds already issued).
  • The technical backdrop (supply and demand) for high yield bonds remains fairly strong, with appetite from a broad spread of investors for the asset class.

Notes

Yield: The income that a bond pays as a percentage of its bond price. A bond paying €3 per annum with a price of €100 would have a yield of 3%.
High yield bonds: These are bonds issued by companies that are rated sub-investment grade by credit rating agencies as there is a higher risk that the company issuing the bonds may not be able to meet their obligations to bondholders. The bonds typically have a high yield to attract investors.
Credit spreads: the difference in yield of a corporate bond over a government bond of the same maturity.
Spread widening: this describes when the difference (spread) between the yield on a corporate bond and that of an equivalent government bond grows (widens), typically during periods of economic uncertainty and risk aversion when investors demand a relatively higher yield on corporate bonds. Spread tightening is where the difference narrows, typically due to optimism surrounding the economy and the outlook for a company.
Fiscal stimulus: government spending and/or lower taxation to help boost the economy
Furlough schemes: job retention schemes in which the government pays some or all of a worker’s salary while they are temporarily unable to work due to coronavirus restrictions.
US Federal Reserve stimulus: the US central bank had expanded its balance sheet by more than US$2.9 trillion in the first few months of the coronavirus (9 March 2020 to 1 June 2020) to help support the US economy, this compares with an expansion of US$1.3 trillion during the peak panic (15 September to 15 December 2008) of the Global Financial Crisis. Source: Refinitiv Datastream, US Federal Reserve total assets.
Pandemic Emergency Purchase Programme: An emergency monetary policy programme set up by the European Central Bank to counter some of the financial risks posed to the economic system by the coronavirus. It permits the ECB to purchase assets via the PEPP (up to €1,350 billion) to support the economy.
European recovery fund: a fund proposed by the Commission of the European Union (EU), potentially worth up to €750 billion that would be made up of grants and loans to help support the EU economy.
New issue premium: Newly issued bonds tends to be issued at a yield that is above the yield on similar bonds traded in the secondary market (already issued bonds) to encourage investors to buy the new issue.
Market technicals: the supply and demand environment for bonds, which contributes to the market price of bonds.
Overweight and underweight positions: an investor in the market with an overweight position in high yield bonds would increase their weighting above the typical benchmark weight for the asset class in their portfolio; the reverse is true for an underweight position. End investors means private or retail investors as opposed to institutional investors.