“We are ready for the fireworks,” said a head of international high yield at an investment house in London. In his opinion, even the destabilising effect of a Donald Trump victory, which the fund manager described as “unexpected”, would last less than a couple of months.
Many investors and bankers speaking to GlobalCapital about the state of the market ahead of the US vote agreed that the high yield market in Europe proved its resilience during a previous scare: the EU membership referendum in the UK in June.
“We’ll go through this like we did before with Brexit," said a head of high yield at a bank based in the Eurozone.
Figures seem to support this optimism. The pace of overall bond sales in the high yield market has increased in the second half the year after lagging at one point more than 60% compared to 2015. They are now above €72bn, only 23% behind 2015’s tally in the same period.
The number of active high yield borrowers in the last quarter of the year so far has jumped from 10 in the same period of 2015 to 17 in 2016 since the start of October, according to GlobalCapital data.
For the past four weeks, the euro corporate investment grade has inflicted losses on investors ranging from 0.6% on triple-B rated paper to more than 1% on bonds with triple-A ratings. The euro high yield total return, however, is positive from the double-B rated paper at 0.5% while it is as high as 1.4% for triple-C notes, JP Morgan said on Monday.
High yield, what else?
Some asset managers are betting their clients will have to come around to the idea of increasing portfolio exposure to high yield debt, if they have not already done so.
“High yield is the only segment of the market that provides gains as total returns,” said one. “If Trump wins, we’ll see the high yield market somehow shaken, and then a pause to take in the changes, and then everybody will focus and carry on."
“The US high yield market is a more structured, more disciplined market than Europe, and reacts to difficulties quite fast,” said a head of global high yield. “That will be a help for us here to get on with it, too [should Trump win — the more disruptive result].”
“We’re already seeing the return of commodity and energy linked issuers to the euro market as oil prices stabilise,” he pointed out.
A third high yield banker also said that investors’ behaviour suggests they are considering factors like slow global economic growth, a situation that is likely to remain after the US elections.
“The gap of demand between triple-C and single-B rated bonds [in the secondary market] is very telling," he said. "Investors are not willing to stretch to search for yield at all cost. The economic environment is one I’m not sure, frankly, if I trust, either.”
According to JP Morgan research, caution has already gripped the high yield buy side. Fund flows of European high yield retail funds fell in the past week with an outflow of €138m.
“However, the degree of outflows in Europe was small in comparison to the $4.1bn withdrawal from US high yield bond funds, the largest weekly outflow in over two years. We attribute this to pre-election uncertainty,” JP Morgan explained.
"Look at the wider picture," said the global head of high yield. "There are corporate sectors still in transition from bank debt to the public markets, we have a long way to go."