Fran Rodilosso, Head of Fixed Income ETF Portfolio Management, CFA
January 29, 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 12/31/2019
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.
1Source: ICE Data Indices. Leverage data is as of 6/30/2019; default rates as of 12/31/2019 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
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ICE BofAML US High Yield Index: comprises below-investment grade corporate bonds (based on an average of Moody’s, S&P and Fitch) denominated in U.S. dollars. The country of risk of qualifying issuers must be an FX-G10 member, a Western European nation, or a territory of the U.S. or a Western European nation.
ICE BofAML Diversified High Yield US Emerging Markets Corporate Plus Index: comprises U.S. dollar bonds issued by non-sovereign EM issuers that are rated below investment grade.
Index returns are not Fund returns and do not reflect any management fees or brokerage expenses. Certain indices may take into account withholding taxes. Investors cannot invest directly in the Index. Returns for actual Fund investors may differ from what is shown because of differences in timing, the amount invested and fees and expenses. Index returns assume that dividends have been reinvested.
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