Choppy waters ahead for high yield

19 May 2020

As global high-yield markets are trying to gauge the extent of lockdown-driven global economic malaise and the positive impact from enormous global stimulus measures, on the other hand, investors should take advantage of further volatility in high yield markets, Eaton Vance believes. 

“Following the strong April rally, we see choppy waters ahead for high yield,” a recent Eaton Vance study on high yield markets said. 

Further to that, fundamentals for high-yield issuers weakened markedly against the backdrop of a sharp contraction in global economic activity which governments and central banks, on their own, could not halt. 

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“We believe investment opportunities do exist across European and US markets and that active, selective exposure to US and global high-yield securities at this juncture will continue to benefit clients. Further volatility in high yield likely – our thinking is to take advantage of this, adding prudently to risk,” the study said. 

At the same time, the report identified the four key areas of opportunity for the global high-yield investors which included primary issuance, European markets, falle angels and the energy sector. 

As far as primary issuance was concerned, this area offered some really good opportunities for high-yield investors to lend to companies that we think are good quality businesses over the long-term as A lot of challenged companies had to come to the market looking for short-term financing to ensure they can get through this pandemic. 

“The second is the European markets. We think that on a like-for-like basis, credit spreads in Europe are looking a little bit more attractive than they are in the US at the moment,” it said. 

In terms of companies that were downgraded from investment grade and became fallen angels, investors should focus on those companies that had the ability to bounce back to investment grade would be able to generate returns from here. 

Following this, the opportunities across the energy sector could be found in returns from bonds in this sector that did not default and had the potential to be significant. 

“Looking ahead then, while we do envisage further bouts of volatility in the near term (those needing to make an allocation now will need a strong nerve), we think market returns on a 12-month view will be relatively attractive in a historical context,” the study said. 

“For the Eaton Vance high-yield team, in particular, we believe our strong capability in terms of fundamental analysis combined with a top-down overlay will remain a positive for clients in an investment environment where the dispersion of returns within the market is likely to be significant.” 



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