Picture this: dislocation and distress in high-yield debt

Ninety One’s Multi-Asset Credit team explains that historically expensive valuations coupled with elevated levels of distress mean the high-yield corporate debt market is an unattractive destination today. The team believes investors can find a much better risk-reward trade-off in other credit markets.

19 Sept 2024

1 minute

Darpan Harar

The chart


The portion of the European high-yield debt market trading at distressed levels has risen (the distress ratio has increased), yet index valuations are historically high (credit spreads are very tight). There’s a dislocation between market valuations and fundamentals.

Picture this: dislocation and distress in high-yield debt

Source: ICE BofA, Bloomberg, Ninety One, August 2024.

The context


This isn’t the first time Ninety One’s Multi-Asset Credit team has pointed out how expensive the high-yield market is in terms of tight credit spreads (see misleading mean and fat tails and phantoms).

Darpan Harar, Portfolio Manager, Ninety One: “Excluding crisis periods, the proportion of bonds in the European high-yield market that are trading with a spread in excess of 1000bps (i.e., distressed) is relatively high. Crucially, credit spreads are tight given the currents level of market distress seen today.”

Equally stark is what is driving this higher level of market stress. Typically, a sector-specific theme has caused the ratio to peak (for example, stress in cyclical or commodity orientated sectors). Today, stress appears widespread, with the weakest and most leveraged companies in a variety of sectors – including typically defensive areas such as healthcare and telecoms - being punished in the form of outsized credit spreads.

Harar states: “The abrupt change in interest rate regime of the past few years is to blame for this, driving fear among investors around the creditworthiness of over-stretched borrowers even if they operate in typically stable sectors.“

The conclusion

Investors in European high-yield debt are earning a low credit spread, especially in the context of the relatively high amount of distress in the market. In fact, market distortions mean high-yield valuations are even higher than they appear, for similar reasons to those outlined here.

Harar concludes: “We believe selectivity is key in this environment, and the high level of dispersion seen in credit markets today means investors can find better value away from many high-yield assets. We see a better risk-reward proposition in areas such as structured credit and select parts of bank capital and investment-grade markets, which also offer an attractive income profile and more favourable downside characteristics”.

Authored by

Darpan Harar

Jeannie Dumas

Communications Director (ex-Africa)

Laura Henderson

Communications Manager

Important Information

This communication is provided for general information only should not be construed as advice.

All the information in is believed to be reliable but may be inaccurate or incomplete. The views are those of the contributor at the time of publication and do not necessary reflect those of Ninety One.

Any opinions stated are honestly held but are not guaranteed and should not be relied upon.

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