In this video, Corporate Credit Portfolio Manager Tom Ross discusses the outlook for the European high-yield market and why he expects it to be relatively stable in the months ahead.

Key Takeaways

• Extensive fiscal programs and central bank support have helped companies navigate the economic shock of COVID-19 and brought confidence back to the European high-yield bond market.
• An acceleration in the spread of the virus remains a risk, but we do not expect a second wave to result in an economic shock as severe as the first wave, as evidence suggests social distancing is proving effective in many countries.
• Absent an economic stoppage at the scale seen in the first quarter, the continued stimulus from global central banks combined with pent-up demand for European high-yield bonds should continue to provide support to the market.

View Transcript

Tom Ross: Hello, this is Tom Ross here, Portfolio Manager within the Global Corporate Credit Team here at Janus Henderson Investors. I wanted to give you a quick update on the high-yield markets. So, what has really the driven the recent rally in the high-yield markets? Well, firstly I think the optimism around the recovery in economies around the globe has been much greater than the market was initially expecting, and this was in line with our view that we have sort of been thinking about more recently.

It seems like the virus is more under control. There are some more risks that which we will come onto in a second but is more the function that we have seen global economies open up to a greater extent than we were initially thinking. one of the reasons for this is, we believe, the extensive fiscal stimulus that has meant that whilst we have seen a rise in unemployment, the furlough schemes mean that the consumer is nowhere near as badly off as it would be during a normal crisis.

So, what are the big risks from here? Well obviously there has been lots of talk about the risk of a second wave and we absolutely acknowledge that that risk is still there but what we would say is that the risk of a second wave of the virus won’t necessarily lead to the same level of lockdown and of economic shock as we saw the first time round. Firstly, most countries are better prepared this time. But it is also more the case – and we are starting to see evidence – that social distancing is actually working as well to control the virus as a full lockdown. So, we think it is unlikely that we will go back into one of those periods of full lockdown again and it also therefore means that the [credit spread] wides we saw in March are unlikely to be retested in the near future.

So, how effective has policy been for the high-yield market? Well, it has been really significant. The central banks have provided such a significant amount of stimulus, almost two and a half times the US Federal Reserve has provided stimulus relative to what it did in the Global Financial Crisis. That’s really significant and they have really greased every single different part of the market to ensure that there is actually no liquidity issue. It has really helped the market to reopen. That’s the key aspect here.

The market is able to self-heal with the Federal Reserve and other central banks as a backstop, it has allowed them new issue market to reopen and that has really allowed companies to get the financing they need to bridge the gap across that big economic shock.

So it has been really significant. And I guess the other thing to add and another reason why the running has been so strong recently is that Europe now really looks sort of strongly together and with the announcement of the European Recovery Fund as well as an increasing in the Pandemic Purchasing Program, that has been really key in ensuring that Europe stays consolidated as well and that really binds the north and the south of Europe much closer together.

So, how attractive are the new issue premiums? Well, sadly, they are not quite as attractive as they were at the start of the new issue cycle. That’s typically how it works. But there are still selectively some opportunities. Now some of those new issue concessions we say have got very small, and I guess that in some cases we have even seen deals priced tighter than the secondary market, which in fact just gives an indication that the secondary market is a little bit too wide and really highlights the grab for yield. But generally, on the whole, selectively there are still really great opportunities to add risk through that new issue market. And especially if you take an area like European high yield where actually there hasn’t been a huge amount of supply, then some of the opportunities there remain fairly good.

Overall, the technical backdrop remains fairly strong. We have seen investors add risk, but more up to neutral positions and covering [reducing] underweights, as opposed to taking any significant overweight type of risk within the markets. And end investors, and we have said this for a long time, we generally believe end investors were quite underinvested in high yields and we really are seeing investors now look to invest in the market and those inflows are really causing an extra demand for the market as well. So the market dynamics remain fairly positive from that perspective.