The high yield market has seen record inflows during the first fewmonths of this year as investors continue their search for income, but are the rewards worth the risk? Emma Cusworth finds out.
“The long-term scenario for European high yield is not particularly good. The compensation for the risk is pretty meagre and economically, Europe is still in a difficult place versus the US.”
Chris Redmond
Markets have notoriously short memories. The high yield market has seen record inflows during the first few months of this year as investors, seemingly hypnotised by the need for yield, piled back in as the December correction faded into distant memory. With the ECB’s surprisingly large bond buying programme now underway as the central bank bought in the region of €10bn in bonds in March, yields continue to be forced ever lower. German Bunds were yielding negative rates out to the seven or eight-year mark by mid-March, for example. In their hunt for yield, investors’ eyes have turned strongly in the direction of the high yield market.
THE HIGH YIELD BINGE
Looking at the ETF market, where flows are arguably a clear and speedy demonstration of shifting trends in investor behaviour, European high yield ETFs saw $2.1bn in net new assets between 21 January, when the ECB first announced its bond buying programme, and 13 March, more than three-times the total €679m net new assets for the whole of 2014. Meanwhile, in the mutual fund space, EPFR data shows European high yield funds tracked by them recorded $3bn net inflows between 22 January and 26 February.
Not all high yield is created equal in the eyes of yield hungry investors. The binge this year has been far more pronounced in European assets than their US counterparts and during the rout in December, while US exposures saw outflows, Europe remained steady. Following the sharp fall in the oil price last year, spreads on high yield in the US market widened up to 1000 basis points in some cases, according to Antoine Lesne, who heads up the ETF Sales Strategy team at SPDR, and were getting close to default.
“This led to outflows from US high yield exposures, even for European domiciled funds,” he says. “The European high yield market did not suffer from the same magnitude of outflows. Flows actually picked up rapidly in 2015.”
The prevalence of energy sector firms in the space has plagued US high yield as the oil price fell. European high yield was less contaminated because of its significantly smaller relative weight to the sector, shielding it from the dramatic fall in the oil price late last year.
IN SUPPORT OF EUROPE
European high yield assets have a plethora of highly supportive factors in their favour. Firstly, the ECB’s intention with its bond buying programme, which was larger than many market participants had expected, continues to be to drive investors into riskier assets. With yields on eurozone government bonds on a downward trajectory, demand for higher yielding assets will remain strong.
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