Investors should take advantage of further volatility in high yield markets

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Global high-yield markets are tussling between trying to gauge the extent of lockdown-driven global economic malaise on the one hand, and the positive impact from enormous stimulus measures that have been announced around the world, on the other.

Stephen C. Concannon, Co-Director of High Yield Bonds Portfolio Manager, Jeffrey D. Mueller Co-Director of High Yield Bonds Portfolio Manager and Dónal Kinsella,  Institutional Portfolio Manager Sub investment grade credit, at Eaton Vance present their views on high yield markets in a recent insight paper.

They note: “Following the strong April rally, we see choppy waters ahead for high yield.

“Fundamentals for high-yield issuers are weakening markedly against the backdrop of a sharp contraction in global economic activity – unknown in its extent right now – and which governments and central banks, on their own, cannot halt.

“We anticipate the pending global recession will last for several quarters.

“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

“There are four areas of opportunity that we see right now for global high-yield investors. The first is primary issuance. A lot of challenged companies have had to come to the market looking for short-term financing to ensure they can get through this pandemic, and this has offered some really good opportunities for high-yield investors to lend to companies that we think are good quality businesses over the long term.

“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.

“The third is fallen angels – companies that have been downgraded from investment grade. We’ve seen a slew of downgrades in the US and European markets, increasing the size of the overall investible universe. We think sensibly investing in companies that have the ability to bounce back to investment grade will be a great way to generate returns from here.

“The fourth area of opportunity is the energy sector – right in the middle of the storm! Defaults will increase in this sector, in our opinion, but returns from bonds in this sector that do not default will also, in our view, 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.

“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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