Fixed income
A tale of two markets: Contrasting the fortunes of European and US High Yield
3 min read 6 Apr 23
The European High Yield (HY) market has outperformed the US market over the last five, 10 and 20 years. We compare the trends in charts and ask: Will this continue and what are the main similarities and differences between the US and European markets?
The returns over the last five, 10 and 20 years are as follows:
Comparing the markets
Both markets invest in sub-investment-grade debt. Whereas the US market has a lower quality bias, the European market has more BBs and fewer CCCs. The European market is also shorter; the weighted average life is around one year shorter. Secured issues are more often found in the European market too.
Sector allocations
Sector allocations are important as default waves tend to hit sectors. We have seen episodes in the financials, TMT and energy sectors. The US market has more exposure to the energy sector, whilst the European market has a higher exposure to the financial sector (unless following a non-financial index).
Default history
Defaults have been more prevalent in the US market. This is as expected as it is a lower-quality index. However, when we control for the rating difference by comparing the single-B default rate, we find that the European defaults are lower. Some sector differences may explain some of the differences (e.g. less energy in the European market), but there are other possible reasons. Firstly, the complexity of insolvency in Europe. There are many jurisdictions, with less tested regimes; Secondly, the 'clubby' European banking market supports companies in trouble; and finally, there might be more stigma for a company entering insolvency in Europe compared to the US.
Current relative value
European HY currently looks attractive when we compare yields and spreads. Despite being better quality, European HY has offered a higher yield since May 2022 (vs US HY hedged to Euros). We also find higher spreads in Europe across the rating scale.
Over the last 20 years, European HY has outperformed the US market despite being shorter and higher quality. Current valuations would suggest that it is well placed to continue the trend.
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.