While the trajectory of monetary policies in the United States and the eurozone appeared very clear and certain at the start of 2024, the renewed vigour of inflation in the United States is putting into question the view held at the beginning of the year. The consensus is no longer clear or certain.

What are the consequences of this change for the High Yield market and how can the management approach be adapted to this new situation?

Let us start by a relatively surprising observation: the High Yield Euro market has been quite insensitive to the recent uptick in interest rate volatility. As such, the volatility of the High Yield Euro has been lower than that of German sovereign debt for the last several months, something that is almost never seen! This phenomenon also apparently contradicts the simple idea that a risky asset is more volatile than an asset (perceived to be) risk-free!

Source: ICE, Bloomberg, figures as of 3 May 2024.

How can this lower volatility of High Yield Euro bonds be explained?

Probably by putting oneself in the position of investors in the current context. The High Yield Euro effectively offers:

An attractive carry around 6% composed of 3% interest and 3% credit spread;
A duration between 3 and 4 years, less than the investable pool of sovereign debt;
Yield stability during the recent turbulence, with the variation in the spread counterbalancing the changes in interest rates, as illustrated by the following chart.

Source: ICE, Bloomberg, figures as of 3 May 2024.

The key probably lies in this final point: the majority of investors analyse the High Yield market on the basis of yield (attractive) rather than credit spread (average).

This attractive yield combined with lower volatility at present is reinforcing the attractiveness of the asset class for the coming months. How can one profit from this opportunity?

We consider that an attractive yield is favourable for carry strategies. In contrast, an average credit spread is unfavourable for strategies seeking capital gains. The carry, risk diversification and the quality within the High Yield Euro should therefore be privileged.

It is on this basis that we have positioned the portfolio of our MAM Target 2027 fund:

Diversification through over 100 issuers. This enables us to substantially reduce the impact an individual credit accident could have on our performance;
Portfolio made up of a majority of BB rated issuers, with a 15% BBB allocation (very low risk of accident) and very rigorous selection within the B allocation;
Investment in senior bank debt that enables us to substantially reduce the portfolio risk and add one of the rare sectors benefiting from high interest rates.

This well diversified portfolio with higher quality than that of the High Yield market offers a gross yield of 5.56%* for an average duration of around three years. We believe that this risk / reward profile is both attractive and well adapted to the current environment of uncertainty concerning monetary policies in which interest rates should remain volatile.

*Yield at maturity of the portfolio as of 05/03/24, source Mandarine Gestion.

Why invest in High Yield bonds despite the uncertain context?

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