US High Yield Comments


What happened in Q124?

Rates have moved significantly wider YTD as the market digests stronger than expected inflation data and the Federal Reserve’s timeline for cuts is pushed out. GDP continues to surprise to the upside and a healthy economy is providing a favorable fundamental backdrop for high yield bonds.

Within US HY, double-B rated credits (+1.23%) underperformed single-B rated credits (+1.60%) and CCC-and-lower rated credits (+2.86%)1 .

While spreads continue to move tighter and sit at or near local tights (324bps), yields at 7.88% continue to provide attractive value for high yield investors. Both secondary and primary demand for bonds remains robust2 .

  • U291cmNlOiBJQ0UgQm9mQSBhcyBvZiA0dGggQXByaWwgMjAyNA==
  • U291cmNlOiBJQ0UgQm9mQSBhcyBvZiA0dGggQXByaWwgMjAyNA==

Talking technical

Technicals continue to be a key driver of positive performance in high yield.  High yield fund cash balances remain healthy and net issuance remains negative with refinancing activity dominating the primary market.

Rising stars continue to outpace fallen angels in 2024 ($6.4bn vs $2.5bn) but will most likely be challenged to match last year’s record ($135bn vs. $24bn)3 .

New issuance has increased dramatically in 2024. There was $87.6bn of new issuance in the first quarter, which was 108% higher than the $42.1bn that priced in the fourth quarter of 2023 and 116% higher than the $40.5bn that priced in the first quarter of 20234 .

The vast majority of new issue activity has gone towards refinancing (84%) with almost 50% of all deals being at the secured level.

The US Leveraged Loan market saw tremendous primary activity with the first quarter’s $317bn of institutional loan issuance being the second most active on record behind only the first quarter of 2017 ($331bn)5 .

High yield new deal performance in the secondary has been very good with strong market sponsorship, producing significant positive alpha.

Trading volumes have trended above average levels all year and on a broad basis, but have more recently narrowed a touch as idiosyncratic situations have captured some of the market’s focus. 

  • U291cmNlOiBKUE1vcmdhbiBhcyBvZiA0dGggQXByaWwgMjAyNA==
  • U291cmNlOiBKUE1vcmdhbiBhcyBvZiA0dGggQXByaWwgMjAyNA==
  • U291cmNlOiBKUE1vcmdhbiBhcyBvZiA0dGggQXByaWwgMjAyNA==

Fundamental comments

Fundamentals have remained healthy overall. Some of the main themes that we have been monitoring around increasing dispersion, idiosyncratic stories and the probability for distressed exchanges to account for more of the default activity going forward are becoming more apparent.

This is playing out particularly in certain larger capital structures without the required financial flexibility to maneuver in today’s higher rate environment. Many of these are more capital-intensive businesses that arguably have a greater need for access to low-cost capital. At the same time, they are struggling to pass through costs or meet the high hurdle on investment required for revenues (and hence profitability) to keep pace with higher interest expense.

In the near term, we believe there is value to be created with active management in how to position exposure within certain capital structures, and how to avoid certain capital structures altogether. 

    Disclaimer

    This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.

    Due to its simplification, this document is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee forecasts made will come to pass. Data, figures, declarations, analysis, predictions and other information in this document is provided based on our state of knowledge at the time of creation of this document. Whilst every care is taken, no representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein. Reliance upon information in this material is at the sole discretion of the recipient. This material does not contain sufficient information to support an investment decision.

    Issued in the UK by AXA Investment Managers UK Limited, which is authorised and regulated by the Financial Conduct Authority in the UK. Registered in England and Wales No: 01431068. Registered Office: 22 Bishopsgate London EC2N 4BQ

    In other jurisdictions, this document is issued by AXA Investment Managers SA’s affiliates in those countries.