High Yield Credit To Remain In The Sweet Spot

High yield credit to remain in the sweet spot

With low default levels expected in 2021, high yield credit offers investors the chance for potentially attractive yields without the backlash.

Credit investors, particularly those operating in the murkiest corners of leveraged loan and high yield markets, have a habit of being professional worriers. The notable performance of the high yield market in 2020 – where we saw the global investment universe returning some 6.5%1 and the US and European equivalents returning 6.2%2 and 2.9%3 – might have calmed concerns for a short time, but that natural propensity to worry has reemerged.

In the early weeks of 2021, when vaccine roll-out plans were yet to get fully underway and Covid infection rates were seemingly out of control in many parts of the world, it seemed counter-intuitive to remain bullish on sub-investment grade credit markets.

After such unusually low default rates in 2020, aren’t we going to face the backlash this year? It seems not…

Last year’s defaults largely occurred in already-troubled names in the retail and energy sectors, which fell after years of struggle. There was no across-the-board wave of disaster stories in the high yield market. The other sectors that make up the asset class only saw small increases on a typical year, reflecting the strained economic environment.

With the potential for a severe liquidity crunch averted by policymakers, blow-ups were broadly avoided and we anticipate 2021 default levels to be around the 5-year median; 3-3.5% in non-investment grade credit. Our expectations are based on high yield companies having plentiful access to funding, policy support remaining largely unchanged, and improving earnings leading to a gradual recovery of credit metrics for issuers in our universe.

Concerns regarding the reflation trade are certainly valid for fixed income investors, but we don’t consider reflation a significant threat to high yield credit.

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Kurt Benson 3 weeks ago Member's comment

Good read, thanks.