European High Yield Update - March 2016
ENERGY REBOUND DRIVES HIGH YIELD RETURNS
How did the European high yield market perform in March?
So, the European high yield market performed very well in March. In fact, it had the best performance for the last four years, 3.8% total return and that is very significant and over the quarter we saw about a 2.1% return from the European high yield market. That compares with a 3.2% return for the US high yield market. And what’s driven that divergence has been a rebound in energy, metals and mining. There’s been quite significant, quite a lot of volatility around the oil price as well. We are still focused on long to medium term fundamental credit stories playing out and we’re well positioned for the future.
What impact did the ECB’s latest announcement have on the market?
The European Central Bank’s (ECB) announcement certainly had an impact on all markets, but also the European high yield market from more of an indirect standpoint. The direct implications were more focused on purchasing non-financials, investment grade corporate bonds. That in turn has benefitted all yielding products and thus we’ve seen a massive rally in investment grade as well as high yield over the last month. The other interesting impact, which the ECB’s had, is on the (Long Term Refinancing Operation) LTRO II. The ability for banks to lend at very low rates and borrow very cheaply from the ECB is having a positive impact on settling some of the credit uncertainty around banks in the market place.
Are there any signs of issuance and liquidity picking up?
Issuance has been very low over March. We’ve almost seen €3 billion of issuance, which is very small compared to previous months. Over the quarter we saw €7.6 billion of issuance, which is in fact been one of the lowest quarterly issuance since mid-2012. There’s a huge amount of pent up demand for new bonds to be issued and we think the pipeline is looking fairly rosy, looking much like the dam is about to burst, maybe over the next few weeks we’ll see a whole raft of new issuance and that should open up the secondary market, improve liquidity but also improve alpha generating capability through selection and selectivity.
2016-GL-3761
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