Category Archives:

high yield

The impact of the technology tantrum on US corporate bond valuations

It is fair to say that markets have become more lively of late. One sector in particular has been the epicentre of revived market volatility – Technology.

In the US high yield market, the US tech sector has weakened relative to the broader US high yield market. Given higher leveraged balance sheets, high yield bonds tend to be more sensitive to sector specific headwinds.

The chart below shows t…

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Can ESG analysis help improve high yield returns?

Some of the worst performing bonds in the European high yield index in 2017 all had weak Environmental, Social, and Governance (ESG) scores according to MSCI.  Is this is a coincidence or is it indicative of a relationship between poor ESG metrics and bond performance?

To find out the answer, we analysed the 2017 total returns of the 365 bonds in the European high yield market that were ESG rat…

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2017 High Yield Review – Another Solid Year

Good performance after an exceptional 2016

2017 was another good year for high yield investors with the global high yield index delivering a total return of 8.0% (in USD terms), albeit this was less exciting than the 16% achieved in 2016. The US continued to outperform Europe but at a far more modest rate compared to 2016, with a 7.5% local currency total return vs Europe’s 6.7%, although much …

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Floating rate versus fixed rate high yield bonds. What are the breakeven scenarios for the next 12 months?

Short term US dollar interest rates continue their march higher. 3-Month USD LIBOR recently hit 1.61%, fuelled by the Fed’s 25 basis point hike on December 13th, a level last seen in late 2008. With further rate hikes on the horizon in the US and a potentially more hawkish European Central Bank, is 2018 the year when floating rate high yield meaningfully outperforms its fixed rate cousin?

The s…

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Low yield, low quality, weaker covenants

When investing in companies of a lower credit quality, loss given default risk is the key threat that investors have to assess. Consequently, covenant protection is a crucial consideration before lending capital to a company. We wrote about covenant protection back in 2014 and it’s fair to say that covenant quality in the high yield market hasn’t improved much since then; actually quite the opp…

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The hunt for emerging market yield is killing covenants

Would you buy a 7-year unsecured bond at 6% yield from a B1/B+ rated Brazilian airline (first time issuer) with well-below-standard credit covenant protection for investors? Many did last week. Few would have a year ago.

This year, many emerging market bond investors have been tempted to lend further down the credit spectrum in search for higher yields. Strong inflows into the asset class combi…

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The decline of covenants in the European leveraged loan market

Guest contributor – Chris Mansfield (Investment Graduate, M&G)

The sustained demand for high yield bonds and European leveraged loans over the past few years, combined with improving corporate fundamentals, has led to strong performance from both asset classes. The large amount of capital available for issuers of higher yielding assets has placed the bargaining power squarely in the hands of th…

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Shaky foundations: the European high yield construction sector

Guest contributor – Saul Casadio (Credit Analyst, M&G Investments)

While European High Yield has delivered a robust performance over the last two years, returning on average 4.9% per year, one part of the index has significantly lagged. Over the same period bonds issued by construction companies have returned an average annual return of -18.4%. The chart below shows that, out of seven issuers i…

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Volatility for U.S. hospital bonds ahead

As the rhetoric of the U.S. presidential race heats up over the summer campaigning months, one topic we are likely to hear much on is health care.  Health care in the U.S. is always a highly charged political subject, and now even more so with extra scrutiny on prescription drug prices and continued debates over the Affordable Care Act (ACA) or Obamacare.  Obamacare is deeply unpopular with the…

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Brexit: The winners and losers in sterling high yield

Much has been written about the impact that the referendum result has had on gilts, the pound and equity markets. In sterling high yield bond markets, we have seen some repricing with the market 2% lower in price terms since the vote. In my opinion, this has been a fairly benign reaction if you consider that the FTSE 250 is around 10% lower over the same time period. One explanation for the mut…

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