Where to Find Value in High Yield Bonds
06 February 2020
High yield bond spreads and yields have steadily declined since their most recent peak in early 2016, notwithstanding a small but meaningful widening in 2018. This reflects slow but generally steady economic growth globally, and a continued search for yield. Although yields are tight by historical standards, comparisons between different segments of the global high yield market reveal potential opportunities. For example, although absolute yields of emerging markets high yield corporate bonds have tightened in recent years, we believe the yield pickup over U.S. high yield compares favorably from an historical perspective. The excess yield of emerging markets over U.S. high yield corporate bonds currently exceeds the levels of 2016, when credit spreads overall peaked, as well as the average level since then.
Attractive Yield Pickup for Emerging Markets High Yield Over U.S. High Yield
Source: ICE Data Indices. Data as of 31/12/2019.
We believe this relative value opportunity is perhaps even more attractive in light of the robust credit fundamentals the asset class exhibits, which compare favorably to U.S. high yield corporates – from both a static and directional point of view. For example, interest coverage ratios among emerging markets high yield issuers were nearly 20% higher than U.S. counterparts, while net leverage was 20% lower, and the 2019 default rate among emerging markets high yield issuers was lower than the U.S. high yield default rate. Further, the asset class has a higher tilt towards higher rated high yield bonds. Continued dovish central bank policy, thawing U.S./China trade tensions and an uptick in global growth may help to offset macro uncertainty, while larger strategic allocations from global investors and favorable net issuance supply trends may also provide support.
For more on emerging markets bonds exposure in the current environment, watch this video with Fran Rodilosso, Emerging Markets Debt: Yield and Diversification.
1Source: ICE Data Indices. Leverage data is as of 30/6/2019; default rates as of 31/12/2019 based on the 2019 default rate of the ICE BofAML US High Yield Index and the ICE BofAML Diversified High Yield US Emerging Markets Corporate Plus Index
Important Disclosure
This is a marketing communication. Please refer to the prospectus of the UCITS and to the KID before making any final investment decisions.
This information originates from VanEck (Europe) GmbH, which has been appointed as distributor of VanEck products in Europe by the Management Company VanEck Asset Management B.V., incorporated under Dutch law and registered with the Dutch Authority for the Financial Markets (AFM). VanEck (Europe) GmbH with registered address at Kreuznacher Str. 30, 60486 Frankfurt, Germany, is a financial services provider regulated by the Federal Financial Supervisory Authority in Germany (BaFin).
The information is intended only to provide general and preliminary information to investors and shall not be construed as investment, legal or tax advice VanEck (Europe) GmbH, VanEck Switzerland AG, VanEck Securities UK Limited and their associated and affiliated companies (together “VanEck”) assume no liability with regards to any investment, divestment or retention decision taken by the investor on the basis of this information. The views and opinions expressed are those of the author(s) but not necessarily those of VanEck. Opinions are current as of the publication date and are subject to change with market conditions. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results. Information provided by third party sources is believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. Brokerage or transaction fees may apply.
All performance information is based on historical data and does not predict future returns. Investing is subject to risk, including the possible loss of principal.
No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of VanEck.
© VanEck (Europe) GmbH / VanEck Asset Management B.V.
