High yield: 3 things to watch in 2019 High yield: 3 things to watch in 2019 http://www.federatedinvestors.com/static/images/fed-logo-amp.png

High yield: 3 things to watch in 2019

Equity market behavior is strongly correlated with high yield performance.
Published
My Content
  • Volatility in equity markets Volatility continues to be the dominant theme for high yield and that volatility is being driven by the equity markets. The correlation is clear: When equity futures are up, high yield benefits. When equity futures are down, high yield is weaker. No doubt, trade and economic fears are causing much of the equity market uncertainty, but our read is that equities are being driven more by longstanding valuation concerns more than by near-term economic conditions. And valuations are being addressed by a series of substantial market declines. Nonetheless, 2% intraday swings in stocks, even when positive, are not a plus for high yield.
  • Macroeconomic conditions We believe high yield will benefit as macroeconomic conditions remain solid, corporate credit quality strong, default rates low and supply of new issuance constrained. Consider, new high-yield issuance was down approximately 40% in 2018 and it appears that December will be the first month in more than a decade with zero new issues.
  • Investor demand This is another factor related to equity market volatility. More stability in the equity market, which we expect, likely will result in the return of investors to high yield. And while a move higher in stocks would be optimal, it’s not necessary. Keep in mind that substantial numbers of ETF investors have moved to the sidelines. A return of investor confidence, combined with strong fundamentals at both the macroeconomic and issuer levels—along with a lack of high-yield supply—will push the spread between U.S. Treasuries and high yield lower, supporting high-yield returns. Unless you believe a near-term recession is likely (and we don’t), our view is the year-end sell-off in equities—and resulting yield spread widening—has made high-yield values look pretty attractive as we approach 2019.
Tags Fixed Income
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.

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.

Federated Investment Management Company

3808439098