2 min read 23 Nov 22
European high yield bond yields have risen sharply this year and are close to 10-year highs as the chart below shows.
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.
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.