Risk assets rally off lows with HY spreads sub-300; focus on quality carry over timing the next selloff.
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Hello & welcome back to The Weekly Fix. My name is Tim Leary & I’m a Senior Portfolio Manager on RBC’s BlueBay Leveraged Finance Team in Stamford, Connecticut.
It’s mid-April, and we’ve certainly had an eventful start to the year. Risk assets have rallied well off their recent lows at the end of March. The market moves from one headline to the next as investors search for conviction. For the moment, the S&P is close to flat on the year. Some feel as though they’ve missed the dip and are on the sidelines. Others are actively derisking with the view that there will be another selloff. Very few seem to be positioned for bull case outcomes. Market snapbacks are often unloved, and this is no different. Headlines & speculation are abundant – whether it’s Iran, AI or Private Debt and the fear is the same – contagion risk.
In times like these, we look for situations where pricing looks unreasonable in either direction. High yield spreads are well off the highs and are now inside 300 bps. All in yields however, have only retraced about half their move higher on the year as treasuries have sold off. High quality high yield bonds remain tight across the board but are particularly snug in sectors like healthcare which are more insulated from energy shocks. Software has underperformed as AI & Private debt contagion provide a one two punch that impacts both fundamentals and the technical in levered credit.
That said, HY technology issuers are in much better shape than leveraged loan or private debt cohort as there are better fundamentals and a larger more diverse group of potential buyers to support the technical. If there is one sector where the baby has been thrown out with the bathwater, it’s HY tech. That said, the buyer base becomes more skittish with every headline about private debt redemptions and questions around what private debt can be sold, refinanced, or will need to be restructured.
Rather than taking large swings in risk, we feel investors are better served in higher quality carry assets, like performing US HY bonds. 88.5% of the US HY market is either double B or single B rated, after all. You can climb the speed bump of a maturity wall with a step stool & the asset class remains under allocated. That said, with spreads inside 300 over, investors should be prepared for sleep at night interest income instead of a near term spike higher in returns. Performing public credit is back to doing what it’s supposed to do, while private credit markets work to meet redemptions by selling what they can as opposed to what they’d like to.
As always, thanks for your time & good luck trading.
Key points
Markets are unloved at current levels – despite the S&P recovering to flat on the year, investors remain split between feeling they missed the dip and expecting another selloff, with few positioned for upside.
While investors are skittish, high yield tech issuers have stronger fundamentals and broader buyer support than their leveraged loan counterparts.
Quality carry is the strategy – with 88.5% of US HY rated BB or B and spreads inside 300 bps, investors should focus on steady income from performing public credit.
