High Yield Outlook 2020

Amidst the low yield outlook in 2020, Asian High Yield may offer investors favourable returns

29 Jan 2020

Record lows for high yield markets

In 2019, the decline of global bond yields has driven strong total returns throughout every segment of the bond market, including high yield.

As 2020 begins, an estimated majority of about 90% of the market value of global high yield universe is trading along a historical bottom in yields. The Euro high yield market currently offers only 2.6%, while US high yield market is near an all-time low of 5.3%.

Within the high yield market, only Asian high yield offers 7.2% - an yield which is within the usual realm of high yield credit.

One of the best times to invest in the high yield bond market is when yields are currently high and predicted to go on a decline.

Based on total return, 2019 surely was a good time to invest. In light of this, what can we expect for 2020?

No material increase in high yield bond yields in 2020

With low government bond yields, low defaults, low volatility, low supply and low spreads, we do not expect any material increase in high yield bond yields in 2020.

1. Low government bond yields

As global economic growth is expected to be at or below trend and inflation to be muted, we foresee central banks will continue to make use of accommodative policies in order to keep short term borrowing rates low. One of the factors for low high yield bond yields is low government bond yields. In line with this, our view is that high yield bonds, along with government bond yields, will remain low and possibly decline slightly during 2020.

2. Low default expectations for high yield companies

As major central banks continue to support growth-oriented monetary policies, it is more likely the market continues to predict high yield companies will continue to be able to access debt capital markets.

Hence, despite potential for higher leverage, the market suggests that risk of default is still not high enough to require an increase in spreads at this time.

UBS-AM High Yield bond default expectations for 2020

Source: UBS Asset Management, data as at December 2019. Note: This does not constitute a guarantee by UBS Asset Management. Long-term average is based on Global High Yield market since 2000, as reported by Moody’s Investors Service.

3. Low volatility

Despite ongoing geopolitical oriented friction, investor uncertainty is also near all-time low. This uncertainty is gauged using the implied spread volatility and the high yield options market. Spread and spread volatility have been low - indicating to us that the market appears highly confident that high yield spreads will stay low.

4. Low supply

A final reason for low high yield bond spreads is low growth in the high yield bond market. This market has not growth substantially since 2014. With supply of new high yield being unable to meet demand growth from fixed income investors, it is difficult for spreads to rise materially in 2020.

Growth of High Yield market

Source: BofA Merrill Lynch Indices, data as at December 2019.

Looking to Asian High Yield for favourable returns

In this outlook, we recommend to continue investing in high yield, but to focus on the high quality segments of the universe which are less sensitive to minor changes in yield or high yield segments where yields are not currently close to all time lows.

Major segments of the global high yield universe are expected to generate positive returns in 2020, but we believe the short duration high yield segment and Asian high yield segment can offer investors two of the most favourable return profiles.

UBS-AM High Yield bond return forecasts for 2020

Source: UBS Asset Management, data as at 31 December 2019. This does not constitute a guarantee by UBS Asset Management.

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