In reality, the high yield market has experienced extreme volatility. A market selloff that started in September – the Index lost 1.2% that month - bled into October. From October 1st through October 20th the Index declined a further 1.7%. Few anticipated what has happened since. Since October 20th, the US high yield market has rebounded 4.0% through November 20th.
The coinciding of several factors explains the ferocity of the recent rally. Interest rates have declined sharply. After peaking at 4.98% on October 19th, the 10-year Treasury yield has plunged to 4.42% as of November 20th. In the blink of an eye, investor sentiment turned bullish once again – the S&P 500 has also rebounded 7.8% since October 20th – resulting in a sudden surge in demand for high yield bonds. According to Lipper FMI, after experiencing outflows of $14.1bn from August through October (including $8.1bn in October), investors poured $10.8 into high yield mutual funds in the three weeks ending November 15th.
In addition, on October 30th, S&P upgraded Ford from BB+ to BBB-, meaning that over $41bn of high yield bonds will exit most high yield indices in November. Ford represents approximately 3.2% of the Index. Ford’s imminent departure from the high yield market has created unusually strong demand for BB bonds, as managers look to replace their exposure. As a result, BB bonds have outperformed during the recent rally in Q4.
Credit trends remain stable within US high yield. As shown in the chart below, the “upgrade-to-downgrade” ratio for the high yield market remains above one (i.e., for every $1 of high yield bonds downgraded by credit rating agencies, $1.27 in high yield bonds were upgraded). While this ratio has declined sharply from the 2021 high, it suggests that broad credit trends remain firm.
Figure 1: Last 12 Months US High Yield Upgrade to Downgrade Ratio (by Par)
Source: JP Morgan. As of November 30, 2023
Beneath the surface, however, there is a stark difference in credit trends between CCC issuers and the rest of the high yield market. As seen in the chart below, so far in 2023 the number of CCC issuers downgraded (65) has significantly outnumbered the number upgraded (38). On the other hand, both BB and B issuers have continued to more frequently experience upgrades than downgrades.
Figure 2: Number of Issuer Upgrades and Downgrades YTD to September 2023
Source: JP Morgan
It is important to note that CCCs represent only 11% of the market, and the credit outlook for high yield remains strong. The quality of high yield bonds has improved significantly over the past decade. The Index is now comprised of 51% BBs (on a par value basis) at the end of 2022, up from 43% at the end of 2011. High yield issuers today are generally publicly traded companies - 69%, according to JP Morgan. Even if the US economy heads into a recession, in our view it is unlikely that default rates spike far above historical norms.
From a historical perspective, spread levels remain fair at 407bps – the middle of the range the market has traded in non-panic environments of 350bps to 550bps. We would expect the market to maintain this range.
Overall yields are attractive relative to historical levels given the rise in rates. Starting yields (currently 8.7% as of November 20th) have generally been good indicators for subsequent 5-year performance for the market. Moreover, US High Yield looks attractive relative to equities, with the spread between the yield on the Index and the earnings yield of the S&P 500 Index now at 4.2%. US High Yield has also performed well relative to equities in past cycles when starting yields for US High Yield have been near current levels.
Figure 3: US High Yield Market Spreads
Source: ICE Data
Index ICE BofA US High Yield Index
As of October 31, 2023
There are many risks in financial markets today. However, we maintain that stable fundamentals and reasonable valuations suggest that US high yield continues to represent a reasonable, lower duration fixed income investment option.
IMPORTANT DISCLOSURE
Availability of this document and products and services provided by MacKay Shields LLC may be limited by applicable laws and regulations in certain jurisdictions and this document is provided only for persons to whom this document and the products and services of MacKay Shields LLC may otherwise lawfully be issued or made available. None of the products and services provided by MacKay Shields LLC are offered to any person in any jurisdiction where such offering would be contrary to local law or regulation. This document is provided for information purposes only. It does not constitute investment or tax advice and should not be construed as an offer to buy securities. The contents of this document have not been reviewed by any regulatory authority in any jurisdiction.
This material contains the opinions of certain professionals at MacKay Shields but not necessarily those of MacKay Shields LLC. The opinions expressed herein are subject to change without notice. This material is distributed for informational purposes only. Forecasts, estimates, and opinions contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Any forward-looking statements speak only as of the date they are made and MacKay Shields assumes no duty and does not undertake to update forward-looking statements. No part of this document may be reproduced in any form, or referred to in any other publication, without express written permission of MacKay Shields LLC. ©2023, MacKay Shields LLC. All Rights Reserved.
Information included herein should not be considered predicative of future transactions or commitments made by MacKay Shields LLC nor as an indication of current or future profitability. There is no assurance investment objectives will be met.
Past performance is not indicative of future results.
About Risk: High yield securities (junk bonds) have speculative characteristics and present a greater risk of loss than higher quality debt securities. These securities can also be subject to greater price volatility.
USE OF ISSUER NAMES
All security, issuer and company names cited herein are done so for informational purposes only. The securities, issuers and companies cited herein are only intended to convey factual information and current market conditions. Such names are not intended, nor should they be construed as, a recommendation to buy and sell any individual security nor as an indication of current or future profitability. Issuers cited herein do not necessarily represent portfolio positions of MacKay Shields or its affiliates, nor does the firm express any views, positive or negative, on such issuers.
SOURCE INFORMATION
ICE Data Indices, LLC (“ICE Data”), is used with permission. ICE® is a registered trademark of ICE Data or its affiliates, and BofA® is a registered trademark of Bank of America Corporation licensed by Bank of America Corporation and its affiliates (“BofA”) and may not be used without BofA’s prior written approval. ICE Data, its affiliates and their respective third-party suppliers disclaim any and all warranties and representations, express and/or implied, including any warranties of merchantability or fitness for a particular purpose or use, including the indices, index data and any data included in, related to, or derived therefrom. Neither ice data, its affiliates nor their respective third-party suppliers shall be subject to any damages or liability with respect to the adequacy, accuracy, timeliness or completeness of the indices or the index data or any component thereof, and the indices and index data and all components thereof are provided on an “as is” basis and your use is at your own risk. ICE Data, its affiliates and their respective third-party suppliers do not sponsor, endorse, or recommend MacKay Shields LLC, or any of its products or services.
CREDIT RATING DISCLOSURES (FOR INDEX)
ICE BofA Credit Ratings
ICE BofA utilizes its own composite scale, similar to those of Moody’s, S&P and Fitch, when publishing a composite rating on an index constituent (eg. BBB3, BBB2, BBB1). Index constituent composite ratings are the simple averages of numerical equivalent values of the ratings from Moody’s, S&P and Fitch. If only two of the designated agencies rate a bond, the composite rating is based on an average of the two. Likewise, if only one of the designated agencies rates a bond, the composite rating is based on that one rating.
COMPARISONS TO AN INDEX
Comparisons to a financial index are provided for illustrative purposes only. Comparisons to an index are subject to limitations because portfolio holdings, volatility and other portfolio characteristics may differ materially from the index. Unlike an index, individual portfolios are actively managed and may also include derivatives. There is no guarantee that any of the securities in an index are contained in any managed portfolio. The performance of an index may assume reinvestment of dividends and income, or follow other index-specific methodologies and criteria, but does not reflect the impact of fees, applicable taxes or trading costs which, unlike an index, may reduce the returns of a managed portfolio. Investors cannot invest in an index. Because of these differences, the performance of an index should not be relied upon as an accurate measure of comparison.
The following indices may be referred to in this document:
ICE BofA US High Yield Index
The ICE BofA US High Yield Index tracks the performance of U.S. dollar denominated below investment grade corporate debt publicly issued in the U.S. domestic market. The ICE BofA US High Yield Index tracks the performance of U.S. dollar denominated below investment grade corporate debt publicly issued in the U.S. domestic market. Qualifying securities must have a below investment grade rating (based on an average of Moody’s, S&P and Fitch) and an investment grade rated country of risk (based on an average of Moody’s, S&P and Fitch foreign currency long term sovereign debt ratings). In addition, qualifying securities must have at least one year remaining term to final maturity, a fixed coupon schedule and a minimum amount outstanding of $100 million. Original issue zero coupon bonds, "global" securities (debt issued simultaneously in the Eurobond and U. S. domestic bond markets), 144a securities and pay-in-kind securities, including toggle notes, qualify for inclusion in the Index. Callable perpetual securities qualify provided they are at least one year from the first call date. Fixed-to-floating rate securities also qualify provided they are callable within the fixed rate period and are at least one year from the last call prior to the date the bond transitions from a fixed to a floating rate security. DRD-eligible and defaulted securities are excluded from the Index.
S&P 500 Index
The S&P 500 Index is an unmanaged index that is widely regarded as the standard for measuring large-cap US stock market performance.
NOTE TO UK AND EUROPEAN AUDIENCE
This document is intended only for the use of professional investors as defined in the Alternative Investment Fund Manager’s Directive and/or the UK Financial Conduct Authority’s Conduct of Business Sourcebook. To the extent this document has been issued in the United Kingdom, it has been issued by MacKay Shields UK LLP, 80 Coleman Street, London, UK EC2R 5BJ, which is authorised and regulated by the UK Financial Conduct Authority. To the extent this document has been issued in the EEA, it has been issued by MacKay Shields Europe Investment Management Limited, Hamilton House, 28 Fitzwilliam Place, Dublin 2 Ireland, which is authorised and regulated by the Central Bank of Ireland.
NOTE TO CANADIAN AUDIENCE
The information in these materials is not an offer to sell securities or a solicitation of an offer to buy securities in any jurisdiction of Canada. In Canada, any offer or sale of securities or the provision of any advisory or investment fund manager services will be made only in accordance with applicable Canadian securities laws. More specifically, any offer or sale of securities will be made in accordance with applicable exemptions to dealer and investment fund manager registration requirements, as well as under an exemption from the requirement to file a prospectus, and any advice given on securities will be made in reliance on applicable exemptions to adviser registration requirements.
当資料は、一般的な情報提供のみを目的としています。
当資料は、投資助言の提供、有価証券その他の金融商品の売買の勧誘、または取引戦略への参加の提案を意図するものではありません。
また、当資料は、金融商品取引法、投資信託及び投資法人に関する法律または東京証券取引所が規定する上場に関する規則等に基づく開示書類または運用報告書ではありません。New York Life Investment Management Asia Limitedおよびその関係会社は、当資料に記載された情報について正確であることを表明または保証するものではありません。
当資料は、その配布または使用が認められていない国・地域にて提供することを意図したものではありません。
当資料は、機密情報を含み、お客様のみに提供する目的で作成されています。New York Life Investment Management Asia Limitedによる事前の許可がない限り、当資料を配布、複製、転用することはできません。
New York Life Investment Management Asia Limited
金融商品取引業者 登録番号 関東財務局長（金商）第2964 号
一般社団法人日本投資顧問業協会会員
一般社団法人第二種金融商品取引業協会会員
MacKay Shields LLC is a wholly owned subsidiary of New York Life Investment Management Holdings LLC, which is wholly owned by New York Life Insurance Company. "New York Life Investments" is both a service mark, and the common trade name of certain investment advisers affiliated with New York Life Insurance Company. Investments are not guaranteed by New York Life Insurance Company or New York Life Investments.
Subscribe to get MacKay Shields insights delivered to your inbox.