High Yield – US Spotlight

Rising Inflation, supply-chain disruptions, and tightening financial conditions have created a negative sentiment amongst the investors. In Year-To-Date 2022, the US High Yield funds witnessed net outflows of $33.8 billion. Year-To-Date July 2022 returns of major asset classes, including HY, were significantly negative. Equities and Emerging Markets have underperformed, compared to debt and developed markets, respectively, while oil markets are a clear winner. On the risk front, spreads have widened highlighting the rising credit risk. The spreads of CCC & lower rated bonds are trending over 1,200 bps. As cost of borrowing increases, corporates have struggled to refinance and/or issue new debt resulting in a substantial decline in high yield issuances in YTD 2022. Furthermore, Federal Reserves’ aggressive stance to hike rates and abate inflation, could have negative implications on growth. The most widely tracked 10Y-2Y US Treasury spread has entered negative territory in July as fears of recessions grip the market. High financing costs and weak cash flows could lead to increased number of companies filing for relief under Chapter 11 bankruptcy protection. The high-risk scenario, however, represents high return opportunities. Investors might stay away from riskier CCC & lower rated bonds and diligently look towards BB / B rated bond for higher yields.