These extracts were taken from Fidelity International’s Fixed Income Monthly View, providing medium-term views from the fixed income team. The full report is attached.
“High Yield (HY) markets enjoyed their third consecutive month of positive returns fuelled by continued support by dovish central bank rhetoric, with spreads 120 bps tighter year to date. Both the Fed and the ECB have clearly decided to be patient and accommodative at least for the foreseeable future in the face of weaker global macroeconomic data. After the moves seen so far this year, the amount of negative yielding assets has surged to over $10 trillion, the highest levels since 2016 when the ECB was undertaking its Quantitative Easing programme. In this environment, demand for income products will persist as a theme for investors, and HY will naturally become an area of focus for asset allocators.
Quality to be found in European HY
“We have shifted our positioning to positive in the European space as we see a combination of valuations, fundamentals and technicals providing a favourable backdrop for this asset class.
“The big theme driving European High Yield markets this month has been the ECB meeting. President Draghi delivered another dovish message and removed any market expectations of interest rate hikes “at least through the end of 2019”. The recently announced extensions of the TLTRO programme will also allow funding to continue flowing through to borrowers in spite of the low growth macro outlook, European default rates are expected to remain very low by historical standards. We have increased our exposure to the asset class and are now overweight, with fundamental, valuation and technical drivers all supportive.
“European High Yield spreads are significantly closer to their 5-year wides than other global HY asset classes. Quality remains amongst the highest in the HY space with BBs representing 72% of European HY total market value compared to 48% in US HY and 53% in Asia HY. Lastly, the technical picture remains supportive as new issuance levels continue to be lower versus last year and primarily concentrated in higher quality BB names, while inflows in the asset class have accelerated.”
Asia HY continues strong performance
“Asian HY continued its strong performance and recorded positive return in March. Market’s optimism on US-China trade talk, further improvement of China credit condition and a broad-based demand for high income products supported Asia high yield performance. Positive news from China on the macro front in March, with manufacturing PMI back above the 50-mark provided an additional boost. On the technical side, we note that supply has started picking up, but so far it has been well-absorbed by the market. We maintain a positive stance to Asia HY, even after the recent strong performance. Indeed, spreads are still attractive compared to their US HY counterparts and appropriately compensate investors for credit risks.”
US spreads widen
“US HY was the only market that saw spreads widen over the month, driven by an uptick in issuance which is typical in the month of March. For now, we keep a neutral stance to the asset class, but are looking for opportunities to increase the average quality of our exposure and marginally reduce risk.”