A high-yield pause that refreshed A high-yield pause that refreshed http://www.federatedinvestors.com/static/images/fhi/fed-hermes-logo-amp.png http://www.federatedinvestors.com/daf\images\insights\article\chairs-lake-shore-small.jpg October 1 2021 September 2 2021

A high-yield pause that refreshed

Brief summer lull didn't derail solid fundamentals.

Published September 2 2021
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It was an “interesting” couple of months for the high-yield market. From early July through mid‐August, it struggled a bit at least on a relative basis. Yield spreads—the difference between yields on U.S. Treasuries and comparable maturity high-yield bonds—widened roughly 50 basis points primarily for three reasons: 1) Concerns over the delta variant; 2) A fairly large amount of high-yield issuer supply; and 3) The rally in U.S. Treasury rates. The interesting aspect is none of the widening reflected concerns about corporate credit or the overall economy. Throughout this period, the equity market continued to set new highs.

Our view is this was a “pause that refreshed” and nothing to worry about. Once high-yield issuance decreased in mid‐August, the market snapped back, tightening 35 basis points by the end of that month with pretty good momentum into September. Also, total returns were positive, with the benchmark Bloomberg US Corporate High Yield 2% Issuer Capped Index returning 38 basis points in July and 52 basis points in August. It’s always important to remember that problems in high yield usually relate to credit issues, which tend to be longer term and fundamentally driven. Short-term market underperformance caused by technical factors, supply bubbles, U.S. Treasuries rallying or other temporary disruptions typically self‐correct and reverse, as they did at the end of August.

All indications point to an economy that will remain strong into 2022 and with it, corporate credit quality. Default rates through year-end likewise are poised to stay extremely low—we believe below 1%. And while it’s a little early to predict, we believe default rates next year will remain below average. That’s why Federated Hermes multi-sector strategies are positioned with the goal of a little more yield, a little more credit risk and a little less interest-rate sensitivity and why our fixed-income sector committee continues to recommend an overweight allocation to high yield.

Tags Fixed Income . Markets/Economy .
DISCLOSURES

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Past performance is no guarantee of future results.

Asset allocation does not assure a profit nor protect against loss.

Bloomberg US Corporate High Yield 2% Issuer Capped Index: The 2% Issuer Cap component of the US Corporate High Yield Bond Index. Bloomberg US Corporate High Yield Bond Index is an unmanaged index which measures the USD-denominated, high yield, fixed-rate corporate bond market. The index follows the same rules as the uncapped version, but limits the exposure of each issuer to 2% of the total market value and redistributes any excess market value index wide on a pro rata basis. The index was created in 2002, with history backfilled to January 1, 1993. Indexes are unmanaged and investments cannot be made in an index.

Bond prices are sensitive to changes in interest rates, and a rise in interest rates can cause a decline in their prices.

High-yield, lower-rated securities generally entail greater market, credit/default and liquidity risk and may be more volatile than investment-grade securities. For example, their prices are more volatile, economic downturns and financial setbacks may affect their prices more negatively, and their trading market may be more limited.

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