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It has been an encouraging start to 2023 in terms of returns, engagement, and activity for high yield (HY).
A drawdown of -11.38%1 in 2022 has set the stage for better returns over the next 1-2 years in this strongly mean reverting asset class. The sharp repricing of government bond yields has taken the Global HY yield to nearly 8.75%2 which has historically proven good entry points for longer term investor.
The challenge for allocators is that greater opportunity is not without risk. Higher interest rates over several quarters tend to lead to defaults due to pressure on corporate earnings and profit margins. The challenge to cash flows from a regime change on funding costs is that they will take a long time to play out - with limited maturities and largely fixed coupon debt this is a multi-quarter or even multi-year process.
However, it can also be costly to sit on the sidelines waiting for lagged quarterly data to confirm that most HY companies have weathered the storm. Global HY is among the most resilient asset classes and tends to rebound quickly after a drawdown, thanks to its consistent, high income.
Exhibit 1: Global HY 1-and 3-year returns historically rebound strongly after rare down years
Source: RBC BlueBay Asset Management and Bloomberg, as at 31 December 2022; Global High Yield represented by the ICE BofA Global High Yield Constrained Index USD Hedged; 3-year returns are cumulative
This document was prepared by BlueBay Asset Management LLP (BlueBay), which is authorized and regulated by the UK Financial Conduct Authority (FCA) and is registered as an investment adviser with the US Securities and Exchange Commission (SEC), and as a commodity pool operator and commodity trading advisor with the National Futures Association (NFA) as authorized by the US Commodity Futures Trading Commission (CFTC).
With respect to the investment performance presented, past performance is not indicative of future performance. Actual account performance may or will vary from the performance shown because of differences in market conditions; client-imposed investment restrictions; the time of client investments and withdrawals; tax considerations; economies of scale; portfolio turnover; the number, type, availability, and diversity of securities that can be purchased at a given time; differences in the underlying currency of the assets in the account, and other factors. Client assets managed using these strategies in separate accounts or different vehicles may be subject to restrictions, fees or expenses that are materially different than those found in the non-US funds.
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