Macro Research US High Yield: Turning cautious on one of th | FSMOne SG - Research Highlights

Macro Research

US High Yield: Turning cautious on one of the top-performing fixed income segments

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• Credit spread for US high yield bonds has tightened significantly, almost back to its all-time low, given fading credit risk and improving credit quality. We believe this cycle of spread tightening has been overdone and valuation for US high yield bonds has turned expensive.

• In our view, the current spread level is also under-pricing credit risk. It is implying an overly low default rate as compared to credit agencies’ projections. Further, a moderating US growth momentum and an expected asset tapering in early-’22 may re-introduce credit risk further down the road.

• We expect limited upside potential from both income and price return. Yield for US high yield bonds has also plunged to near all-time low and offers no meaningful pickup against other high yield segments. Moreover, we see limited scope for spread tightening as factors that drove the initial compression will likely fade moving ahead.

• The risk-reward for US high yield bonds is increasingly skewed to the downside in our opinion. We caution against taking a large amount of risk in US high yield and recommend lightening exposure by reducing any overweight in the portfolio.

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