High Yield Bonds were a relative winner in 2022 in a year that saw every fixed income segment except cash deliver negative total returns. The question investors are asking now is whether spreads will widen further in 2023.
Current yields in both the U.S. and Europe are touching high single digits. Well above 10 year averages. High yield is delivering high yield. Which also means that being a corporate treasurer of a high yield rated corporate in 2023 will not be easy.
Refinancing the short duration liabilities characteristic of the high yield market will be very sensitive to the outlook for growth and inflation. Whilst margin preservation and expansion was possible during the covid period, in a recessionary environment, passing through higher input and labour costs to consumers will be tougher.
But these smart high yield corporate treasurers know this. Many have taken pre-emptive action by reducing balance sheet leverage and increased interest coverage to levels not seen since the early 2010's.
But whilst the fundamentals on average across high yield may look decent, investment managers and rating agencies are expecting default rates to rise, albeit from a low levels historically. Despite the current discounted bond prices.
So whilst there is a likelihood of spread widening, the magnitude will be sensitive to the depth and length of the recession, and the monetary policy response. Which in turn raises an even more important question for investors: Where in the rating tables - from CCC to BB - should their high yield investment manager be focused in 2023? Check out all High Yield Bond Investment Manager analysis inside RFPnetworks.
