SSGA: Global high yield spreads not attractive now

SSGA: Global high yield spreads not attractive now

July 19, 2023

High Yield
Outlook vooruitzicht (14).jpg

Receding macro risks, fading bank credit issues, capital markets opening up, and better-than-expected earnings resulted in good performance of global high yield.

‘Global high yield spreads of around 450 bps are only at the 37th percentile of all-time, and don't seem outright attractive at these levels,’ comments David Furey, Head of Fixed Income Strategists EMEA at State Street Global Advisors, today. ‘Given that credit is an asymmetric asset class, there doesn't seem to be enough compensation for probable bearish outcomes. However, strong balance sheets, low near-term recession risks, improved ratings quality compared to history, a lack of huge volumes of credit negative transactions — such as new buyouts or dividend recaps this cycle, and all-in yields at around 8.5% — make the bar to withdrawing capital from the asset class far higher than at any point in the past decade.

The concern that central banks will need to aggressively kill off the cycle is less compared to the previous year. As inflation is moving in the right direction, we would advocate a cautious hold for investors who have already allocated into the asset class. For investors looking to allocate/increase, we suggest looking for better spread levels, particularly after June's rally.

Investment opportunities to deploy capital at better levels do arise frequently as crowded positions get unwound and sentiment moves around as part and parcel of a normal policy tightening cycle. Investors may consider moving/allocating to higher quality such as BB–B rated segments, or liquidity screened segments (versus broad market high yield), depending upon their risk aversion, given the stage of the credit and macroeconomic cycle we are in now.’

Shallower default cycle

Key take aways from SSGA’s Global High Yield Quarterly Update of today:

  • Tightening credit conditions, hawkish central bank rhetoric, and lack of strong support from inflows in the medium term remain as concerns.
  • We expect a longer but shallower default cycle this time. The defaults expected in the next 12 months are 3.5% for US HY and 2.5% for EUR HY.
  • At 450 bps, global high yield spreads are not especially cheap, but it is expensive to be underinvested in a short-duration asset class yielding 8.5%.

 

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