Welcome to VanEck
VanEck is a global investment manager with offices around the world. To help you find content that is suitable for your investment needs, please select your country and investor type.
Emerging markets corporate high yield bond spreads continue to stand out following the selloff experienced in March and April. While U.S. high yield bond spreads remain elevated, they are tighter compared to the widest levels reached in late March. In addition to the magnitude of the spreads, which continue to hover around 1,000 basis points, the yield pickup versus U.S. high yield corporate bonds remains historically wide. Since 2004 this differential has averaged 108 basis points, but was 224 basis points as of 19 May 2020, nearly two standard deviations away from this long-term average.
Source: ICE Data Indices as of 19/5/2020. EM High Yield is represented by ICE BofA Diversified High Yield US Emerging Markets Corporate Plus Index, U.S. High Yield is represented by ICE BofA US High Yield Index
Several sectors expected by many to be most impacted by negative global growth are exhibiting distress, including Energy, Basic Industry (particularly Metals & Mining), Retail and Transportation. However, we believe emerging markets energy issuers have held up better than U.S. issuers overall due to the greater presence of quasi-sovereigns. Elevated spreads, however, are not confined to these most impacted sectors, and as shown below, these sectors do not have significantly greater weights within emerging markets compared to the U.S. market, indicating a general re-pricing of risk within emerging markets rather than sector-led weakness.
Are these levels attractive? Clearly the market is pricing in a substantial amount of risk at these levels, including a significantly higher probability of defaults. Whether these spreads are adequate compensation will depend on the ultimate impact of the pandemic and the speed at which global growth will recover.
It is worth noting that emerging markets corporates went into this downturn with what we believe are relatively stronger fundamentals compared to U.S. counterparts, including lower levels of leverage and higher coverage ratios to service debt. Further, we expect to see more “fallen angels”—which are high yield bonds that were originally issued with investment grade ratings but subsequently downgraded—emerge. For example, Pemex1, with over $40 billion of index-eligible debt, entered the emerging markets high yield benchmark at the maximum weight of 3% at the end of April (but did not enter U.S. high yield benchmarks due to index eligibility rules). With both corporate and sovereign downgrades likely, we anticipate that more fallen angels will follow. Given the historical propensity of these bonds to sell-off prior to downgrade, enter the index at deep discounts and subsequently recover in value, these fallen angels may provide some tailwinds to the asset class.
13.5% of fund net assets as of 26 May 2020. For a complete list of holdings in the ETF, please click here: https://www.vaneck.com/ucits/etf/income/hyem/overview/
For informational and advertising purposes only.
This commentary originates from VanEck Investments Ltd, a UCITS Management Company under Irish law regulated by the Central Bank of Ireland and VanEck Asset Management B.V., a UCITS Management Company under Dutch law regulated by the Netherlands Authority for the Financial Markets. It is intended only to provide general and preliminary information to investors and shall not be construed as investment, legal or tax advice. VanEck Investments Ltd, VanEck Asset Management B.V. and its associated and affiliated companies (together “VanEck”) assume no liability with regards to any investment, divestment or retention decision taken by the investor on the basis of this commentary. The views and opinions expressed are those of the author(s) but not necessarily those of VanEck. Opinions are current as of the commentary’s publication date and are subject to change with market conditions. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. All indices mentioned are measures of common market sectors and performance. It is not possible to invest directly in an index.
All performance information is historical and is no guarantee of future results. Investing is subject to risk, including the possible loss of principal. You must read the Prospectus and KIID before investing in a fund.
No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of VanEck.
© VanEck Investments Ltd / VanEck Asset Management B.V.
© 2020 VanEck.