The renewed risk-on sentiment was apparent in the month of June as investors piled back into high yield bonds with issues surpassing the $46.7 billion mark. The number of high yield debt issues climbed past the $46.4 billion marks set in September 2013.
Per a Bloomberg report, the rise in high yield issues came as companies “Companies rushed to build cash war chests to see them through the disruption amid the economic slump caused by the pandemic, which triggered a slew of bankruptcies. The Federal Reserve plans to purchase some types of high-yield bonds to boost liquidity spurred by record demand from investors.”
“You get an invitation to a party from the Fed, Treasury, and Congress — they offer to pick you up, take you home and bring you breakfast in bed the next morning,” said Bill Zox, a high-yield bond portfolio manager at Diamond Hill Capital Management.
“You know it is going to be a party like no other,” said Zox, whose firm oversees more than $20 billion in assets.
With interest rates at historic lows, companies were certainly tempted to reissue new debt issues and refinance current debt at low rates to stay afloat. Per the Bloomberg report,
Steven Oh, global head of credit and fixed-income at PineBridge Investments, noted that risk sentiment is moving towards an “optimistic recovery path”
However, don’t expect high yield debt issuance to sustain this momentum. Per the Bloomberg report, “issuance will slow significantly in the second half of 2020, ending the year at $280 billion to $300 billion, according to Srikanth Sankaran, head of U.S. and Europe corporate credit strategy at Morgan Stanley.”
“Issuers have built up significant liquidity buffers,” said Sankaran. “Companies will focus on balance sheet repair and bringing down leverage.”
High Yield Opportunities in EM
Despite the coronavirus putting emerging markets in a downtrodden state, there is still value to be had in EM assets via ETFs like the Goldman Sachs ActiveBeta Emerging Markets Equity ETF (GEM). GEM seeks to provide investment results that closely correspond, before fees and expenses, to the performance of the Goldman Sachs ActiveBeta® Emerging Markets Equity Index.
Another option is the VanEck Vectors EM High Yield Bond ETF (NYSEArca: HYEM), which seeks to replicate the ICE BofAML Diversified High Yield US Emerging Markets Corporate Plus Index, which is comprised of U.S. dollar-denominated bonds issued by non-sovereign emerging market issuers that have a below investment grade rating and that are issued in the major domestic and Eurobond markets.
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