Fixed income

High yield continues to rebound since the lows of Covid

Market Update

To be sure, the month’s economic data remained deeply rooted in negative territory when viewed on a year-over-year basis. Then again, some of the month-over-month changes from April to May produced some spectacular turnarounds, as the country began the process of emerging from the stay-at-home directives. In fact, it was not uncommon for the descriptive narrative accompanying the release to include the word, record. Gains were reported in employment, manufacturing, construction, and the all-important category of goods and services consumption. That said, the improvements, though welcomed, still left total economic activity well below the economy’s potential and far short of year-end 2019. The ICE B of A Merrill Lynch U.S. High Yield Index posted a positive total return of +0.98% in June, the third consecutive positive monthly return. The high yield recovery slowed in June as investors weighed the prospects of a V-shaped economic recovery with increasing Covid-19 infection rates across the county. The high yield market saw continued strong positive inflows for June of approximately +$9.7 billion. High yield new-issue activity increased dramatically during June, registering the most active month for new-issue on record. In total, 90 bonds priced totaling $61.5 billion, as compared to $47.3 billion priced in May. There were 9 high yield bond defaults in June totaling $16.25 billion (Valaris was $5.67 billion), and 4 distressed exchanges. The par-weighted default rate increased to 6.19% at the end of June, up from 4.85% last month.

During June, U.S. High Yield underperformed U.S. Equities (S&P 500 +1.99%) and U.S. Corporates (+2.02%), but outperformed U.S. Treasuries (+0.11%). Within U.S. High Yield, BB-rated credits (+1.03%) outperformed single B-rated credits (+0.11%) but underperformed triple C and lower-rated issues (+3.14%). From a sector perspective, 14 of the 18 sectors in the index posted positive monthly returns. The best performing sectors were Real Estate (+3.26%), Automotive (+2.98%), and Energy (+2.60%). On a relative basis, the worst performing sectors were Utility (-0.88%), Healthcare (-0.84%), and Leisure (-0.64%). The High Yield Index’s Option Adjusted Spread was 644 basis points at the end of June, 10 basis points tighter for the month. The High Yield Index’s yield-to-worst ended the month at 6.85%, which is a decrease of 8 basis points from the start of the month (6.93%). Finally, the High Yield Index’s average price was $94.78 at month end, $0.85 higher than the $93.93 average price at the start of the month.

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