Volatility in the high yield market has made headlines, and once again investors are asking if this is the start of the next significant sell off. Analyzing the source of recent volatility can help investors determine if recent spread widening is a symptom of broader systemic risk or an attractive opportunity to increase allocations to high yield.
Earlier this year, we published Anatomy of a Credit Market Sell Off. Our analysis demonstrates that in order for the overall index to widen meaningfully, a large industry needs to experience outsized problems or a handful of industries need to collectively weaken at the same time.
Viewing high yield market volatility through this lens provides useful context. A closer look at recent spread widening reveals that volatility was not caused by a broader trend impacting a particular industry or group of industries. In fact, 12 issuers accounted for roughly half of the recent high yield spread widening, and the volatility was driven by idiosyncratic challenges. Examples include the breakdown of the merger between Sprint and T-Mobile, issues with legacy wirelines and hospitals, the ratings downgrade of Teva Pharmaceutical and statements by the Justice Department indicating an opposition to the AT&T and Time Warner merger.
The technical backdrop also exacerbated the recent pullback in high yield, as high yield mutual funds and ETFs experienced outflows at the same time as new issues increased.
Based on these observations, we viewed recent volatility as an attractive opportunity to increase allocations to high yield rather than a sign of broader systemic risk. Our conviction was bolstered by our positive outlook for corporate health over the next several months—with limited overall input cost pressure, we expect corporate profit margins will be resilient as we move into the new year.
As it turns out, despite the negative headlines, the volatility proved to be short lived as the high yield market recovered and spreads ended the week much closer to their post-crisis tights. For multi-sector fixed income strategies, this week’s movements in the high yield market reinforce the importance of close collaboration between macroeconomic, credit research and portfolio management teams to appropriately evaluate and take advantage of these opportunities as they arise.
Past performance does not guarantee future results.
This commentary has been prepared by Voya Investment Management for informational purposes. Nothing contained herein should be construed as (i) an offer to sell or solicitation of an offer to buy any security or (ii) a recommendation as to the advisability of investing in, purchasing or selling any security. Any opinions expressed herein reflect our judgment and are subject to change. Certain of the statements contained herein are statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (1) general economic conditions, (2) performance of financial markets, (3) changes in laws and regulations and (4) changes in the policies of governments and/or regulatory authorities. The opinions, views and information expressed in this commentary regarding holdings are subject to change without notice. The information provided regarding holdings is not a recommendation to buy or sell any security. Fund holdings are fluid and are subject to daily change based on market conditions and other factors.