High Yield debt has come under pressure in past few quarters from a combination of disappointing economic data and stress in the energy sector. However, recently high yield has shown signs of recovery as some of these risks have receded. In this week’s IDB we consider if the tide has turned for high yield debt?
- US high yield debt has been highly sensitive to disappointing US economic data in the second half of 2015 and the start of this year, but since mid-February the balance of US data has surprisingly turned more positive and supported a recovery in high yield.
- Stress in the US high yield market has come principally from the energy sector on the back of oil price declines. US high yield is down -3% since Q3 2014, however if we strip out the energy sector it delivered a total return of +3.6%
- Growth expectations for 2016 are slightly lower than previous years, however the US economy looks in pretty good shape. Despite this, high yield debt spreads are more consistent with past recessionary environments.
- Credit metrics for high yield remain encouraging, with controlled leverage and comfortable interest coverage. As the headline risks have faded, investor flows into the asset class have picked up steeply in recent weeks.
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