“It could be an opportune time to enter HYUP in light of recent spread widening to attractive levels,” said Luke Oliver, Head of U.S. ETF Capital Markets at DWS. “The risk-off sentiment in the HY market over 4Q18 has pushed spreads for US HY approximately 200bps wider. We believe this could present an attractive entry level into US HY.”

TickerIndexIndex YieldDurationRatings Average % BBB- to BB-% B+ to B-% Below B-
HYUPSolactive USD High Yield Corporates Total Market High Beta Index8.594.21B+27.20%58.75%14.05%
HYDWSolactive USD High Yield Corporates Total Market Low Beta Index5.413.22BB78.57%21.11%0.32%
HYLBSolactive USD High Yield Corporates Total Market Index7.123.76BB-50.88%41.40%7.72%
HYGMarkit iBoxx USD Liquid High Yield Index7.033.79BB-53.07%40.18%6.75%
JNKBloomberg Barclays High Yield Very Liquid Index7.664.65B+41.52%46.98%11.50%

 

No Recession in Sight

As for concerns regarding a global economic slowdown, Oliver doesn’t forecast a recession happening in the U.S. anytime soon, making high-yield opportunities a play worth considering. A confluence of a more dovish Fed, forthcoming earnings and stabilizing oil prices could foster an environment where high yield can thrive after investors were spooked the past few months.

“While we may be entering into the later stages of the credit cycle, we view the probability of a near-term recession as low, and, importantly, expect default rates could remain low,” said Oliver. “Corporate earnings should remain sound despite the likelihood that corporate executives will lower full-year expectations during 4Q18 reporting later this month. We believe recent indications are that Fed rate moves will be more measured. Oil prices appear to be stabilizing. Additionally, technical factors should be supportive with portfolio managers reporting cash balances above historical levels, dealer balance sheets holding low inventory and projections for near-term issuance being modest.”

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