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Global High Yield 2020: Squeezing water from a stone

Kris Xippolitos

By Kris Xippolitos

Head - Fixed Income Strategy

December 12, 2019Posted InFixed Income and Investment Strategy

Supported by low refinancing risks, low default rates and a low yield environment, global high yield (HY) bonds have enjoyed outsized returns in 2019. Looking forward we remain constructive on HY markets, as downside risks have been reduced. This is consistent with our relatively optimistic outlook for the New Year.

However, expectations for HY bond performance in 2020 should be moderated. We expect US HY bonds to generate returns between 4-5%, with CCC-rated debt underperforming. We expect similar performance in US bank loans where “all-in yields” above 6% are attractive, with lower price volatility. This can create attractive risk-adjusted returns, relative to other markets.

In Europe, we expect euro-denominated HY bonds to return between 2-3% in 2020, as European Central Bank bond purchases support spreads. However, lower absolute bond yields offer less support if core rates rise, as we expect. We expect slightly better returns in Euro bank loans, where carry opportunities are higher.

UK and Asia HY markets also offer attractive opportunities, where spreads and yields are higher and have the scope for tightening. Average sterling-denominated HY bonds yield 5.5%, while Asia HY yields are near 8.5%. Of course, both markets come with heightened risks around Brexit and rising US/China trade tensions.


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