Why stop at the 15%ile when the 10%ile beckons? Continuing the rally in credit spreads that began in October 2023, March managed to take another 20bps out of the high yield spread (Figure 1), even as bankruptcies rebounded for the month. Despite these tight credit spreads, and perceived loose financial conditions, new high yield issuance (Figure 2) remains depressed even as investment-grade issuance soars to a record.
Figure 1: High Yield Credit SpreadsSource: Bloomberg
Figure 2: New IssuanceSource: Bloomberg
While many highlight the improvement in the 2024 credit maturity wall (Figure 3), much of this improvement has occurred in the levered loan market where floating rates have already crystallized the pain and brought companies to the table to refinance; far less progress has been made in high yield. In fact, almost half of 2024 maturities remain unaddressed from March 2023. With these bonds now inside one year, the risks of defaults are rising.
We continue to believe tight credit spreads are largely a byproduct of the limited issuance. As coupons flow to high yield credit managers, they can either build cash positions or reinvest the coupons into existing secondary issues. The evidence suggests they are doing the latter.
Figure 3: High Yield Index MaturitiesSource: Bloomberg
While we have seen credit spreads tighten and some components of business activity turn higher, we continue to see rising levels of distress (Figure 4) and are excited to have obtained protection at such inexpensive levels.
Figure 4: Trailing 1yr Corporate Bankruptcies Over $50MM in AssetsSource: Bloomberg, Simplify Asset Management
If we are wrong in our caution, then the additional compensation from high yield will continue to offer excess returns and protection against a resurgent inflation cycle. If, on the other hand, we are right that credit is in the quiet before the storm, we’ll be quite happy with our hedged position.
Register for Simplify's Investor Hub
In-depth case studies provide valuable insights into practical portfolio problems and their solutions
Simplify curated model portfolios that show investors how to incorporate alternatives into their portfolio
Stay up-to-date with our latest thoughts on markets via our weekly market commentaries
