Three things to watch in European high yield fixed income

2 min read 23 Nov 22

European high yield bonds are warranting a closer look by investors given the significant re-pricing of fixed income markets during 2022. In today’s market environment, we are nearing double-digit all-in yields for the asset class, and prices are now re-visiting levels seen during the Covid-19 crisis. Here are three things to watch at this point in the cycle.

1. European high yield is finally living up to its name

European high yield bond yields have risen sharply this year and are close to 10-year highs as the chart below shows. 

2. We believe compensation for defaults, low levels of short-term refinancing and convexity are all supportive factors at current levels

European high yield is currently pricing in a very severe default cycle. For instance, BB-rated bonds price in 33.2% of the index to default over the next 5 years, compared to 7.4% in an average 5-year period, and 19.9% for the worst ever 5-year period as per the chart below. We believe that investors are being well compensated for the risks of default.

3. Investors have been compensated historically for entering the market at these spread levels 

Typically when high yield spreads have been greater than 600 basis points (bps), the trailing 3-year annualised total return has been close to double digits.

In conclusion, we believe the European high yield market currently offers an attractive opportunity, where investors are being compensated for the risk. Levels today offer an attractive entry point to build into risk positions, in our view.

The value of investments will fluctuate, which will cause prices to fall as well as rise and investors may not get back the original amount they invested. Past performance is not a guide to future performance. The views expressed in this document should not be taken as a recommendation, advice or forecast. 

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