The political and monetary uncertainty is shaking risk assets. In the face of volatility, High Yield bonds are showing a resilience that is uneven but nonetheless notable.

This is a particularly interesting time to analyze both the macroeconomic context and High Yield markets: we have reached the 100-day mark of the Trump presidency (only 1,361 to go!), a month after the launch of the trade war, with two months still to go in the “pause” on tariffs imposed by the United States on the rest of the world.

Before offering a perspective on the current situation, it is important to assess the dynamics of the High Yield market during the highly volatile month of April: what was the impact of Liberation Day on High Yield markets?

A limited High Yield repricing compared to equity markets

During the month of April (Liberation Month?), High Yield markets declined by around -3%, whereas equity markets fell by approximately -12%. This corresponds to a High Yield beta versus equities of about 25%. This sensitivity is higher than the two-year average of 10%, a period which admittedly experienced low volatility (particularly with no real correction in 2024). Nevertheless, it remains relatively low, illustrating the “less risky” nature of High Yield bonds compared to equities.

Source: Mandarine Gestion, period from 31/03/2025 to 28/04/2025. Past performance is no guarantee of future results.

Why is High Yield less sensitive to trade war risk than equities?

High Yield is less risky than equities for two main reasons. First, debt ranks senior to equity in the event of liquidation, bankruptcy, or any credit event. Second, servicing debt (interest and principal payments) requires cash generation, not profits - something many companies are capable of even when they report little or no profit.

There is also a cyclical factor working in favor of High Yield: companies, aware for two quarters of the looming tariff risk (see the alerts on Mexico and Canada from January-February), have reduced investments, postponed spending, and bolstered their cash positions as the period of elevated risk approached. As a result, High Yield companies have improved their credit quality in recent months.

What’s the outlook for High Yield after one month of trade war?

We now need to look at current yield levels and compare them to pre-correction levels, to risk-free asset yields, and to “fair” yields - those which compensate for expected default and recovery rates over the coming quarters.

As of April 28, High Yield market yields are as follows:

Euro HY: 5.62% vs. 5% before the correction
US HY: 7.55% vs. 7% before the correction

For risk-free assets:

5-year German yield: 2.05% vs. 2.15% before the correction
5-year US yield: 3.84% vs. 4% before the correction

This indicates an approximate 0.50% increase in High Yield yields, while benchmark rates have fallen - clear evidence of an increase in the risk premium, making High Yield more rewarding.

How to factor in the potential impact of the trade war on High Yield?

This period of uncertainty is likely to continue, with two opposing effects: on the one hand, an economic slowdown that weakens the fundamentals of High Yield issuers; on the other, very cautious and wait-and-see management strategies that support credit profiles through increased cash generation. This is taking the form of canceled or postponed investments, reduced inventories - hence a decrease in working capital - and a clear prioritization of deleveraging over dividends and share buybacks. In conclusion, the impact on High Yield appears mixed overall, and the rise in the risk premium is making this asset class more attractive today.

Completed on 29/04/2025

High Yield markets put to the test after one hundred days

Dernières Actualités