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European High Yield Market

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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Sell in May and go away – does it work for European fixed income?

As is usually the case on 1 May, there was a plethora of articles and commentary on the “sell in May and go away” effect. If you are unfamiliar with this highly sophisticated trading strategy, it involves closing out any equity exposure you may have on 30 April and re-investing on 1 November. Historically, U.S. equities have underperformed in the six-month period commencing May and ending in Oc…

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Stand up for your rights! Covenant erosion in high yield bond documentation

2013 saw a record year for new issue volumes in the European high yield market. A total of $106bn equivalent was raised by non-investment grade companies according to data from Moodys. Whilst this is beneficial for the long term diversification and growth of the market, there have been some negative trends. Given the intense demand for new issues, companies and their advisors have been able to …

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A vintage year for high yield issuance?

Much like fine wines, we believe that the year in which a bond is issued is an important factor in shaping its inherent character. The right climate in the markets, like the right weather conditions in the Gironde, can influence the nature of a security for better or for worse. 2013 is already a record year for the new high yield issuance in Europe (see the chart below). But will 2013 be one of…

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High yield – it’s pickin’ time

It’s fair to say that we have been toning down our view on the high yield market of late. We could well see returns in the high single digits for 2013, but the potential for more substantial capital gains is less apparent in today’s context.

This does, however, ignore quite a powerful feature of the current high yield environment – the scope for exploiting opportunities and pricing dislocations…

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Fallen Angel Delight – looking at returns from “junked” companies

Earlier this year, Stefan highlighted the potential for sovereign debt downgrades to push big European companies into high yield territory becoming “fallen angels”, issuers downgraded from investment grade to high yield. This is something the Financial Times has also recently picked up on. The chart below shows how near the average European sovereign ratings are to sub-investment grade.

Rating…

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The quiet de-coupling of high yield from equity markets continues

High yield and equities have historically been seen as highly correlated in terms of their returns, and before 2008, this was true. However, what we have witnessed in the post-Lehman environment is a structural shift that requires a more nuanced appreciation of the relationship between fixed income and equities. This is something we looked at in a more in depth piece we published earlier this y…

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European High Yield – Crossing the Value Rubicon

As we’ve stated earlier this year, we think the European high yield market is presenting us with some very interesting opportunities. As of 6th October, one of the high yield indices that we track had an average yield to maturity of 12.0%. This equates to a risk premium above and beyond government bonds of around 10.4%, a level that we believe more than compensates investors for expected defaul…

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A guided tour of the European High Yield market

As my esteemed colleague Stefan pointed out earlier this year, we are beginning to see some attractive value emerging in the European high yield market. I thought it would be worth giving a quick update on what is being priced in and also peel back the lid on the market and take a peek inside at some of the individual high yield issuers lurking within.

Let’s start with the overall market. As of…

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Sell off in high yield markets provides a buying opportunity

The price action in the high yield market has been brutal over the last few weeks. A very respectable year-to-date return of 3.8% as at end of June currently stands at -1.3% (according to the Merrill Lynch European Currency HY Index as at 15/08/11). That’s a significant re-pricing of risk. To put it in context, look at the iTraxx Europe Xover Index (for an explanation, see here). The most liqui…

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