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Public Fixed Income

Climbing High Yield’s Wall of Worry

January 2019 - 4 min read

In this Q&A, Barings’ Head of Global High Yield, Martin Horne, weighs in on some of the major risks facing the high yield markets today and discusses where his team is seeing opportunities.

There is quite a bit of uncertainty in the markets today, much of it pertaining to the credit cycle. How is this affecting high yield?

We hear lots of questions from investors regarding where we are in the credit cycle and when we might experience a downturn. The concerns aren’t unfounded—history has shown that these runs always have an end date. With that in mind, the question becomes how to stay invested in the high yield markets.

At this stage, we think it’s important to draw some comparisons between today’s markets and the pre-financial crisis markets, which in reality look very different. One of the key differences is that, heading into the 2008 crisis, there wasn’t much thought about the inevitable downturn, or questioning of the sustained high returns. Today it’s much different—forecasts show growth, but they show relatively measured growth. Capital structures look far more resilient and are holding up well to stress tests. And the vast majority of the index is still very investible, in our view.

We also believe credit spreads in the current market are compensating investors fairly for the amount of risk they are taking. Bond and loan spreads today are 1.5-2 times wider than they were pre-crisis, with better underlying credit fundamentals, and supported by a low default environment and positive economic growth outlook.

That said, there are definitely parts of the market that we would avoid, underscoring the importance of an active approach versus just tracking an index. While that is always the case to some degree, this approach can be particularly valuable as you move through the later stages of a prolonged cycle.


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