UBS: Why high yield bonds look better in the Eurozone than the US
During the latest market downturn, US high yield fell less than stocks. But while we still see the appeal of US high yield bonds, the risks surrounding the asset class have increased. By contrast, high yield issuers in the Eurozone offer appealing returns with a higher degree of safety.09.10.2015 | 10:20 Uhr
The high yield (HY) market in the US has done investors proud in recent years. Since late 2011, when CIO first recommended the asset class, it has delivered an average annual total return of 6.5%. Even during the latest market downturn, US high yield fell less than stocks. But while we still see the appeal of US high yield bonds, the risks surrounding the asset class have increased. By contrast, high yield issuers in the Eurozone offer appealing returns with a higher degree of safety.
Let’s start with the positives. As part of a long-term strategic portfolio, US high yield bonds remain attractive – offering an 8.1% yield-to-maturity with a volatility that is about half that of the S&P 500. The market also has a history of recovering swiftly from setbacks. It took US HY just eight months to return to its previous peak following the 2008 crisis, compared to about fouryears for the S&P 500.
Even the short-term outlook is far from grim. The recent bout of risk aversion has left US HY trading at a relatively generous 650 basis point spread over equivalent government bonds, against an 18-year average of roughly 500 basis points. We believe this will fall back to 525bps as investors recover their appetite for risk assets over the coming six months. The average US high yield issuer currently is not struggling to service debt – trailing EBITA (a measure of available cash flow) of 3.3 times average interest costs is still above its 15-year average.