High Yield - Europe Spotlight

The European HY market rebounded in 2023, with benchmark HY index generating YTD 6.1% returns. Amid rising interest rates, HY bond returns outperformed IG returns due to attractive yields in the short term. The European HY issuance grew 15% YoY with total issuance climbing to EUR 31 bn during YTD Aug 2023. However, the Eurozone market will continue to face periods of elevated stress and volatility over the near-to-intermediate term due to prohibitive rates policy by global central banks. Europe fell into technical recession early this year amid the shock of high food and energy prices. Moreover, 10-year-to-2-year spread, a technical indicator, has also been inverted since Nov 2022. As per Fitch, the last 12-month default rate for Eurozone High Yield stood at 1.6% in 1H 2023 and is expected to rise to 2.5% by end-2023 and 4.0% by end-2024. That said, HY companies with stronger liquidity and cash flow generation are well positioned to survive the economic uncertainty.