Alternatives

Assessing High Yield Bonds in the Current Environment

Assessing High Yield Bonds in the Current Environment
clock
1 min 49 sec

High yield allocations late in the cycle may seem like a bad idea, but investors’ need for yield in the face of falling rates for government bonds is strong.

The credit market is still appealing. The higher coupon-clipping aspect of spread has led to superior returns over time. High yield fundamentals broadly speaking remain stable, although with signs of slight deterioration, according to Morgan Stanley, with interest coverage steady at roughly 4.5x though EBITDA growth has been weaker over the past year. However, the fundamentals are much better than just a few years ago, when the collapse in oil prices socked energy and the entire high-yield universe traded down.

HY Interest Coverage
HY EBITDA, Debt and Sales Growth

High yield managers are cautious, telling us they have to really pick their spots. Long-term appeal aside, many managers are trying to rotate out of the sector; sentiment is that now is not a good time to initiate positions. Managers focused on credit are moving up in quality, in anticipation of an economic downturn and widening spreads, saving dry powder for a plunge back into distressed opportunities.

HY Volume Traded vs. Turnover

High yield spreads are tight (375 bps OAS, Bloomberg Barclays High Yield Index, 10/23/19), although not at their all-time lows (233 bps 05/23/07). The sentiment is for widening in the next 6-18 months. The tightening in high yield has thus far been concentrated in the Ba- and B-rated segments, with spreads tightening to a lesser degree in the Caa segments.

High Yield Spreads by Credit Quality

The institutional investors that Callan works with are focused on the U.S. high yield market; we do not see much global high yield exposure. High yield investing requires boots on the ground, making non-U.S. high yield more daunting and expensive for U.S. investors.

High yield runs the risk of becoming a bit of an orphan in the U.S. The greatest take-up of high yield is in U.S. public defined benefit plans. But these plans are now pursuing private credit in their search for yield and diversification, as a component of their growth assets, and they are concentrating their public fixed income in Treasuries and other higher-quality sectors to provide a sleeve of liquidity and flight-to-quality protection.

Posted by

Share
Share on facebook
Share on twitter
Share on linkedin
Related Posts
Private Markets

Private Credit Managers Outperform Leveraged Loans

Daniel Brown
Callan experts analyze private credit performance in 3Q24.
Public Markets

Stellar Markets Across Asset Classes

Kyle Fekete
Callan expert assesses the global markets in 3Q24 and the outlook heading into the election.
Private Markets

Nonprofits: Same Mission, but New Approach to Allocations

Tony Lissuzzo
Callan expert discusses changes in nonprofit allocation trends over the last 20 years.
Private Markets

Gains Outpace Leveraged Loans Over Time; Spreads Contract

Constantine Braswell
Callan experts analyzes private credit activity in 2Q24.
Public Markets

Gains for Stocks Mask Wide Disparities; Little to No Change for Bonds

Kristin Bradbury
Callan expert analyzes the global stock and bond markets in 2Q24.
Private Markets

Private Credit Gained in 4Q23 but Lagged High Yield Benchmark

Constantine Braswell
Callan expert analyzes private credit activity in 1Q24.
Public Markets

Stocks Continue Rally; Bond Returns Fall Amid Rate Cut Uncertainty

Kristin Bradbury
Callan expert analyzes the performance of global markets in 1Q24 and the outlook for the year.
Private Markets

Private Credit Performance Tops Leveraged Loan Index Over Long Time Periods

Alternatives Consulting Group
An update on private credit performance in 4Q23
Public Markets

Stocks Near a Record High, and Bonds Reverse Course

Kristin Bradbury
Kristin Bradbury analyzes global stock and bond markets in 4Q23.
Private Markets

Private Credit Returns Exceed Those of Leveraged Loans

Roxanne Quinn
Our analysis of 3Q23 private credit activity.

Callan Family Office

You are now leaving Callan LLC’s website and going to Callan Family Office’s website. Callan Family Office is not affiliated with Callan LLC.  Callan LLC has licensed the Callan® trademark to Callan Family Office for use in providing investment advisory services to ultra-high net worth clients, family foundations, and endowments. Callan Family Office and Callan LLC are independent, unaffiliated investment advisory firms separately registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940.

Callan LLC is not responsible for the services and content on Callan Family Office’s website. Inclusion of this link does not constitute or imply an endorsement, sponsorship, or recommendation by Callan LLC of their website, or its contents, and Callan LLC is not responsible or liable for your use of it. When visiting their website, you are subject to Callan Family Office’s terms of use and privacy policies.