From trade wars and Brexit to central bank posturing and recessions, there is no shortage of risks facing today’s markets. As we consider high yield in the context of this turbulent environment, there are five takeaways we think are worth considering in the months ahead.
A market dominated by volatility and dramatic headlines—if this environment feels familiar, perhaps it’s because it is.
Since the 2008 financial crisis, the high yield market has experienced several risk-on/risk-off periods. From the sovereign debt crisis in 2011 and the taper tantrum in 2013, to the energy and commodity shock in 2015 and, most recently, the headline-induced turbulence in the fourth quarter of 2018, this market has experienced numerous risk flare-ups, lasting anywhere from a few weeks to several months.
Throughout these periods, a look beyond some of the more negative headlines revealed what has actually been a relatively healthy market. Corporate fundamentals, overall, remained stable. Defaults hovered near all-time lows. And global growth was largely supportive.
It’s not altogether surprising, then, that all of the abovementioned dips were followed by periods of recovery and gains. Take the fourth quarter of 2018, for example. As equities experienced a near bear-market drop,1 parts of the high yield market saw spreads widen to a level that implied distress in excess of that experienced in the post-Lehman period, painting a significantly more bearish picture than we currently assume.
All of this said, economic cycles by nature have an end date. Downturns do come, and we are
undoubtedly closer to one today than we were three or five years ago, albeit one that is likely less severe than the financial crisis. With that in mind, this piece takes a close look at the high yield markets and outlines five key takeaways for investors in the months ahead.
- A condition in which security prices fall 20% or more over, typically over a two-month period.