Time to give up on high yield debt?
By Nandini Ramakrishnan, Global Markets Strategist, JP Morgan Asset Management
Investors have turned to high yield debt as an income supplement to record low government bond yields. But with the US Fed poised to raise rates for the first time in a decade next month, can HY still play that role?
The yields available from high yield debt have risen in over the last 12 months in Europe and America, prompting the question of whether a buying opportunity has opened up for investors.
There is no doubt where the main stress is located, and hence where yields have risen the most: energy. As US oil production rose in recent years, firms in the industry issued significant amounts of high yield paper.
In fact, the amount of outstanding debt in the JP Morgan US HY index that was made up of energy issuers peaked in autumn of 2014, right as the oil price started to settle at its current lows. The decline in the oil price has placed many of these firms under financial stress. Default is a real possibility in many cases, and the price of the bonds has fallen significantly, leading to a surge in their yields.
But, as the chart below shows, the recent sell-off has not been confined to just the energy sector. Yields have risen across all industry groups in both the US and Europe. Beyond the energy sector, fundamentals in both Europe and the US suggest the whole of the universe has been unduly punished for the sins of the few.