US High Yield Comments
- 10 April 2024 (3 min read)
What happened in Q124?
Rates have moved significantly wider YTD as the market digests stronger than expected inflation data and the Federal Reserve’s timeline for cuts is pushed out. GDP continues to surprise to the upside and a healthy economy is providing a favorable fundamental backdrop for high yield bonds.
Within US HY, double-B rated credits (+1.23%) underperformed single-B rated credits (+1.60%) and CCC-and-lower rated credits (+2.86%)1 .
While spreads continue to move tighter and sit at or near local tights (324bps), yields at 7.88% continue to provide attractive value for high yield investors. Both secondary and primary demand for bonds remains robust2 .
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Talking technical
Technicals continue to be a key driver of positive performance in high yield. High yield fund cash balances remain healthy and net issuance remains negative with refinancing activity dominating the primary market.
Rising stars continue to outpace fallen angels in 2024 ($6.4bn vs $2.5bn) but will most likely be challenged to match last year’s record ($135bn vs. $24bn)3 .
New issuance has increased dramatically in 2024. There was $87.6bn of new issuance in the first quarter, which was 108% higher than the $42.1bn that priced in the fourth quarter of 2023 and 116% higher than the $40.5bn that priced in the first quarter of 20234 .
The vast majority of new issue activity has gone towards refinancing (84%) with almost 50% of all deals being at the secured level.
The US Leveraged Loan market saw tremendous primary activity with the first quarter’s $317bn of institutional loan issuance being the second most active on record behind only the first quarter of 2017 ($331bn)5 .
High yield new deal performance in the secondary has been very good with strong market sponsorship, producing significant positive alpha.
Trading volumes have trended above average levels all year and on a broad basis, but have more recently narrowed a touch as idiosyncratic situations have captured some of the market’s focus.
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Fundamental comments
Fundamentals have remained healthy overall. Some of the main themes that we have been monitoring around increasing dispersion, idiosyncratic stories and the probability for distressed exchanges to account for more of the default activity going forward are becoming more apparent.
This is playing out particularly in certain larger capital structures without the required financial flexibility to maneuver in today’s higher rate environment. Many of these are more capital-intensive businesses that arguably have a greater need for access to low-cost capital. At the same time, they are struggling to pass through costs or meet the high hurdle on investment required for revenues (and hence profitability) to keep pace with higher interest expense.
In the near term, we believe there is value to be created with active management in how to position exposure within certain capital structures, and how to avoid certain capital structures altogether.
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