High Yields: Halfway there?
The shock was the story in the first quarter, the stimulus was the story in the second—but we’re decidedly not yet in the post-COVID era, and the path to economic recovery remains unclear. What does that mean for high yield?
On the one hand, high yield has regained much ground, albeit amid intermittent bouts of volatility, with the asset price rally that began in the second quarter persisting through much of the third.
Companies have continued to successfully raise capital, evidenced by another quarter of elevated issuance—particularly in the U.S. high yield bond market, where issuance surged to a near-record $125 billion. While much of that has been in support of refinancing’s, there are indications of a growing M&A pipeline, suggesting companies are beginning to once again think longer-term.
Default expectations have accordingly remained in moderate territory, down significantly from peak-COVID forecasts.
Although volatility returned at the end of the third quarter, performance was positive during the period, with U.S. high yield bonds and loans returning +4.68% and +4.13%, respectively.
The European market also ended the quarter in positive territory, with loans returning +2.69%, followed by bonds at +2.49%. Spreads have retraced ground as well, though remain elevated relative to pre-COVID levels.
