Picture this: The ‘Big Shrink’ in high-yield markets
The US high-yield market has contracted by 11% since its peak in December 2021. The Multi-Asset Credit team explains what this means for investors.
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Market summary
- In a continuation of the broader trend seen year-to-date, most credit markets delivered positive returns over the third quarter. But there was significant variation across the asset class.
- In the more traditional parts of the market, US investment-grade and high-yield markets outperformed their European counterparts, given the impact of rising interest rates in Europe.
- In more specialist areas of the asset class, the bank capital market (AT1s) continued its strong run. Agency mortgage-backed securities benefited from falling US Treasury yields and tighter spreads, with the dovish shift from the US Federal Reserve and a September rate cut boosting this market.
- The loan market also performed well, and in the collateralised loan obligations (CLOs) market, outperformance of lower-rated (riskier) tranches evidenced the stronger risk appetite over the quarter.
Where to focus and what to avoid
- Investors can find a favourable combination of income and downside protection in less-explored parts of the market, including structured credit (including agency mortgage-backed securities), loans, and selective parts of the short-duration high-yield and bank capital markets.
- In more traditional markets – such as US high-yield debt and US investment grade – credit spreads remain near the tightest (most expensive) levels seen over previous cycles. These warrant caution and a selective approach to investing.
- More broadly, sectors with a domestic focus - such as utilities and financials – are less likely to be impacted by trade tariffs.
- Despite tight headline valuations across the asset class, dispersion remains relatively elevated, creating opportunities for active, bottom-up investors.
For the full breakdown of Q3 and to see our latest scorecards for the credit universe, read the PDF below.
