High Yield: Coronavirus market volatility - performance update
Insights

High Yield: Coronavirus market volatility – performance update

The outlook for economic growth has dramatically worsened over the past week as Covid-19 fears have taken hold. On the back of this, earnings expectations and the macro outlook have also materially deteriorated. This increased uncertainty is reflected in risk market pricing, including high yield.

Specifically, European high yield strategy spreads have widened by more than 300 basis points since the end of February (see Figure 1):

Figure 1: European high yield spreads

Source: ICE BofAML indices, as at 17 March 2020

Figure 2 below, meanwhile, shows the year-to-date basis spreads. Macro fundamentals are pointing to the likelihood of a negative growth impact from Covid-19. While corporate balance sheets are reasonably well positioned, future earnings are uncertain given the knock-on effect of the virus. Outflows for US high yield strategies have increased in recent weeks, with last week posting a $5.1 billion outflow, the largest for the asset class since early 2017, following $4.2 billion the previous week.

Figure 2: Changes in European high yield spreads in 2020

Market
16/03/2020
31/12/2019
Change bps
Change %
2020 observations
Europe
740
329
411
125%
Europe outperforming
BB
544
215
329
153%
High quality credit underperforming
B
1079
434
645
149%
High quality credit underperforming
CCC
1409
895
514
57%
Lower quality credit outperforming
USA
838
360
478
133%
US underperforming
BB
616
202
414
205%
High quality credit underperforming
B
917
356
561
158%
High quality credit underperforming
CCC
1620
1008
612
61%
Lower quality credit outperforming
Energy
1921
673
1248
185%
Energy underperforming

Source: ICE of BofAML indices, 17 March 2020.

In European high yield, last week’s outflow was around €2 billion, of which €760,000 was in ETFs. The new issuance market has also come to a halt. Still, as active managers we continue to see some potential “pearls in the rubble” as certain sectors and names, which earlier were deemed “expensive” given their tight spreads, now start to look interesting as valuations have become more attractive.

Since the start of the year the portfolio has been moderately underweight market beta and maintains on a sector basis an underweight in cyclicals such as autos, transportation and basic industries, while it is overweight in healthcare, technology, media and financial services. Recent activity includes raising cash through the sale of some short-dated maturities, which had performed well and were starting to look expensive, in case of short-term liquidity needs. We also reduced holdings in some names in the transport, energy and leisure-related sectors.

We expect further disruptions to come due to the coronavirus situation and its ramifications. The most recent few trading days have shown that the market is highly stressed and showing signs of disruption. The wider markets are now driven by the shock to the real economy and by political decisions in response. This is moving the market into unchartered territory and making it difficult to assess. What had started initially as a typical sell-off where weaker credits sold-off heavier than stronger credits, has now developed into a more indiscriminate sell-off across all sectors and all rating classes within high yield. Sectors which normally are relatively stable, e.g. leisure parks, are now experiencing a structural shock for which it is hard to say how long it will take for the recovery. Given how indiscriminate the recent sell-off has been, it is a challenging environment which will remain highly volatile and uncertain as things can change very quickly.

20 March 2020
Roman Gaiser
Roman Gaiser
Head of High Yield, EMEA
Share article
Share on twitter
Share on linkedin
Share on email
Key topics
Related topics
Share article
Share on twitter
Share on linkedin
Share on email
Key topics
Related topics

PDF

High Yield: Coronavirus market volatility – performance update

Important Information

The research and analysis included on this website has been produced by Columbia Threadneedle Investments for its own investment management activities, may have been acted upon prior to publication and is made available here incidentally. Any opinions expressed are made as at the date of publication but are subject to change without notice and should not be seen as investment advice. Information obtained from external sources is believed to be reliable but its accuracy or completeness cannot be guaranteed.

Related Insights

17 September 2021

Mark King

Head of Investment Content

Market Monitor - 17 September 2021

Stock markets around the world have had another volatile week, with concerns about the difficult post-Covid recovery to the fore once again. Most major indices have, however, managed to avoid serious losses.
Read time - 2 min
16 September 2021

Natasha Ebtehadj

Portfolio Manager, Global Equities

Cats, rivers & regulation: the lowdown on Chinese equities

Natasha Ebtehadj looks at the country from an equity investment perspective following a for-profit ban in education companies and increased regulation around its tech giants.
Read time - 3 min
14 September 2021

Daisuke Nomoto

Portfolio Manager, Japanese Equities

Topix hits 30-year high as PM Suga announces resignation

Daisuke Nomoto examines the events that have seen Yoshihide Suga resign as PM, looks at the potential candidates to replace him, and the implications of each for the market.
Read time - 3 min

You may also like

Investment approach

Teamwork defines us and is fundamental to our investment approach, which is structured to facilitate the generation, assessment and implementation of good, strong investment ideas for our portfolios.

Awards

Columbia Threadneedle Investments has received accolades across a wide range of sectors and funds, demonstrating the breadth of our investment expertise.

Contact

For more information about Columbia Threadneedle Investments or our products please contact us.