Bond Market Observations

High Yield’s Global Puzzle

  • High Yield performance has been increasingly tied to global events, with developments in economies outside the U.S. affecting sentiment for riskier assets.
  • Markets are evaluating later cycle fundamentals, which have the potential to create headwinds.
  • High Yield valuations are tempting given investment grade alternatives.

The performance of U.S. risk assets is not merely tied to what happens within our borders, as is evident in the chart below. Doubts about the economic momentum of China, swings in oil and other commodity prices that are set in world markets, and skittishness induced by policy makers have left their imprint on pricing. In our view, the near-term global landscape is littered with upcoming events potentially important to the performance of risk assets: the referendum on whether the UK stays in the European Union, national elections in Spain and Japan, and the U.S. presidential election. Technicals have been strong for risk assets on the back of easy monetary policy globally, encouraging investors to reach for income in an increasingly negative-yield world. Over the short-term, spreads may be sustainable – but for how long?



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