Public Fixed Income

High Yield: Finding Value in a Landscape Rife with Risk

April 2020 – 8 min read
Concerns surrounding COVID-19, lower oil prices and a global recession have weighed heavily on markets—including global high yield bonds and leveraged loans. While value opportunities are emerging, the landscape is punctuated with risks that must be carefully navigated.

The fallout from the coronavirus is already causing economic deterioration, and will likely continue to weigh heavily on consumer sentiment as countries across the globe adapt to the new reality of travel bans, closed schools and working from home. High yield has felt the full effects of this in recent weeks, as bond and loan spreads have widened past levels experienced during the European sovereign debt crisis (2011), the commodity crisis (2016) and the volatile period in the fourth quarter of 2018. While spreads today aren’t quite at the wides seen during the global financial crisis, the trajectory and pace at which asset prices have moved in recent weeks is certainly reminiscent of that period.

Also evocative of the financial crisis, the selloff we’ve seen recently is less a result of changes to the underlying credit fundamentals of corporate issuers, at this time, than of an exogenous or unforeseen shock—in 2008, the bankruptcy of Lehman Brothers; today, the global pandemic. While we would expect fundamentals to deteriorate, particularly in more vulnerable sectors, spreads in high yield today—anywhere from 600 to 1,300 bps over the base rate—may be overcompensating for the real risk to corporate earnings. 

Indeed, while defaults are likely to rise, particularly in more troubled sectors, we think they will remain largely manageable and in easily identifiable areas. With regard to corporate earnings, we expect a majority of issuers may be poised for a relatively sharp recovery from the pandemic itself, once supply lines open back up and companies return to more recognizably normal trading. We believe investors will act rationally to bridge the extreme nature of the event, providing liquidity support where necessary to help companies through the disruption. In addition, many of the companies in this space have positioned their maturity walls well following the high levels of recent refinancing activity. This, together with the low base rate environment, should help mitigate the impact of subsequent economic weakness.

Want to read the full article?

View PDF

Martin Horne

Head of Global Public Fixed Income

David Mihalick

Head of Private Assets

Any forecasts in this material are based upon Barings opinion of the market at the date of preparation and are subject to change without notice, dependent upon many factors. Any prediction, projection or forecast is not necessarily indicative of the future or likely performance. Investment involves risk. The value of any investments and any income generated may go down as well as up and is not guaranteed by Barings or any other person. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

Any investment results, portfolio compositions and or examples set forth in this material are provided for illustrative purposes only and are not indicative of any future investment results, future portfolio composition or investments. The composition, size of, and risks associated with an investment may differ substantially from any examples set forth in this material No representation is made that an investment will be profitable or will not incur losses. Where appropriate, changes in the currency exchange rates may affect the value of investments. Prospective investors should read the offering documents, if applicable, for the details and specific risk factors of any Fund/Strategy discussed in this material.

Barings is the brand name for the worldwide asset management and associated businesses of Barings LLC and its global affiliates. Barings Securities LLC, Barings (U.K.) Limited, Barings Global Advisers Limited, Barings Australia Pty Ltd, Barings Japan Limited, Baring Asset Management Limited, Baring International Investment Limited, Baring Fund Managers Limited, Baring International Fund Managers (Ireland) Limited, Baring Asset Management (Asia) Limited, Baring SICE (Taiwan) Limited, Baring Asset Management Switzerland Sarl, and Baring Asset Management Korea Limited each are affiliated financial service companies owned by Barings LLC (each, individually, an “Affiliate”).

NO OFFER: The material is for informational purposes only and is not an offer or solicitation for the purchase or sale of any financial instrument or service in any jurisdiction. The material herein was prepared without any consideration of the investment objectives, financial situation or particular needs of anyone who may receive it. This material is not, and must not be treated as, investment advice, an investment recommendation, investment research, or a recommendation about the suitability or appropriateness of any security, commodity, investment, or particular investment strategy, and must not be construed as a projection or prediction.

Unless otherwise mentioned, the views contained in this material are those of Barings. These views are made in good faith in relation to the facts known at the time of preparation and are subject to change without notice. Individual portfolio management teams may hold different views than the views expressed herein and may make different investment decisions for different clients. Parts of this material may be based on information received from sources we believe to be reliable. Although every effort is taken to ensure that the information contained in this material is accurate, Barings makes no representation or warranty, express or implied, regarding the accuracy, completeness or adequacy of the information.

Any service, security, investment or product outlined in this material may not be suitable for a prospective investor or available in their jurisdiction. Copyright in this material is owned by Barings. Information in this material may be used for your own personal use, but may not be altered, reproduced or distributed without Barings’ consent.