Andrzej Skiba, Head of BlueBay U.S. Fixed Income, and members of his investment team deliver level-setting market commentary and forward-looking insights into what's driving fixed income markets in this weekly series.
US High Yield: attractive yields, selective opportunities
Charlie Whinery, Portfolio Manager on the BlueBay U.S. Fixed Income team, discusses how the market is offering attractive yields, but investors should be cautious of geopolitical risks and focus on credit selection for value opportunities.
Key points:
- US high yield market performed well in Q3, and the market remains strong, with robust issuance, low leverage levels, and healthy interest coverage, making it an attractive option for investors.
- While geopolitical risks, such as potential tariffs on Chinese goods, pose challenges, the front of the curve is seen as a safe haven, and credit selection will be crucial for finding value in higher-yielding opportunities.
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Welcome to the latest edition of The Weekly Fix. I’m Charlie Whinery, a portfolio manager with RBC’s BlueBay US Fixed Income Team focused on US High Yield, based in Stamford Connecticut.
Last week Andrzej Skiba shared some thoughts about the year ahead, so I thought I would provide a bit of a recap of Q3 and where we find ourselves today. US high-yield investors were rewarded with solid returns in the third quarter, with the Bank of America Merrill Lynch High Yield Index returning 2.4%, out-performing Investment Grade during a period in which the 10-year Treasury rallied 8 basis points and high-yield spreads tightened by 16 bps.
US issuance in the quarter remained robust at almost $140 billion during the quarter, mostly to refinance maturities over the next couple of years. Further, leverage levels remain relatively low and interest coverage, while off the highs, remains well above historical norms. The punchline here is that the high-yield market remains in a strong position in the early days of the fourth quarter.
To that end, we are constructive about the outlook for the remainder of the year as high-yield continues to offer attractive all in yields relative to history and current alternatives within the fixed income universe. While spreads don’t screen as particularly cheap, we expect the FED to be supportive with the DOT Plot signaling 50 bps of cuts for the remainder of the year.
Offsetting this constructive backdrop, we can’t ignore certain risks and given the last week, geopolitical risks specifically. Looking to the equity markets we saw an aggressive sell-off last Friday, following a social media post from President Trump suggesting that the United States would impose an additional 100% percent tariff on Chinese goods, above and beyond current levels, in response to certain Chinese actions related to Rare Earth Minerals.
On Monday, investors who continued to use a buy-the-dip strategy were rewarded with strong 1 day returns as President Trump and Secretary Bessent each struck more conciliatory tones over the weekend. However, sentiment shifted again overnight. The point of this is not to suggest that we know the direction of travel vis-à-vis tariffs and trade wars (we don’t), but rather to point out that there are large risks that are difficult to assign probabilities to.
As a result, and as Andrzej highlighted last week, we see the front of the curve as a nice place to “hide” so to speak. Additionally, with spreads at the tighter end of the historical range we don’t think you need to chase yield for yields sake, meaning we don’t think moving down in quality is necessary to drive returns. That’s not to suggest that we don’t see, and won’t find, idiosyncratic value in certain higher yielding opportunities, but instead that these opportunities are few and far between and that credit selection will be critical.
Perhaps the reported $55 billion LBO of Electronic Arts will reawaken the animal spirits of private equity firms to pursue deals that will create new opportunities in future periods, but we’ll have to wait and see.
Until next week, thanks for joining the Weekly Fix.
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