US high yield market update - November 2022

Key points: 

• High yield continues to behave in an orderly fashion
• Limited issuance continues to provide a strong tailwind
• Retail and consumer product began to see moderation in prices but other sectors showing signs of economic slowdown

While volatility remains a prominent theme across all assets, high yield continues to behave in an orderly fashion.  Overall volumes are light and perceived weakness is met with buyer interest - we have yet to see any larger examples of forced selling.  UK Pension drawdowns had negligible impact on our market. 

28th October’s high yield ETF inflow of +$2.4 billion was among the largest on record.  The recent inflows into high yield ETFs (+$7.7 billion since Oct. 14) are providing substantial near term technical support to high yield which also includes rising stars, coupon, tenders, and maturities.  Active managers have notably been using technical strength to opportunistically reduce exposure to different segments of the HY market

High yield investors have an eye towards other potential unexpected points of leverage inside and out of the domestic corporate bond universe.  A good example of this was the recent move in the Japanese yen and subsequent Bank of Japan (BOJ) intervention to stabilise the currency.  We have seen forced redemptions come from such moves historically but the BOJ seems to have eased any such fears for now.

The primary market remains open for higher quality credits and companies with positive momentum.  Most issuers are able to exercise patience given longer duration, lower coupons in existing capital structures.  Limited issuance continues to provide a strong tailwind for high yield.

Decompression remains topical within the high yield market while dispersion is growing and the most distressed credits continue to lose sponsorship in traditional high yield portfolios. 

As we enter earnings season, it is already clear that slight misses versus expectations will be punished severely while meeting/ beating is met with lackluster response from the market.  Tenet Healthcare was a good example of this earlier in the month, trading 3-5 points lower post earnings, only to rebound with the market strength the past few days.

Sector overview

Many high yield issuers, particularly companies without publicly held equity, report financials later on in the earnings season.  As such, our sector overviews will be provided when more companies have provided their reports.  However, there have been a few themes worth highlighting from early reporters, as well as large capitalisation issuers that are outside the high yield market:

• Basic and intermediate chemical companies are showing signs of an economic slowdown, but this is more consistent with going from peak to midcycle levels, rather than trough.  Several issuers reported year-over-year (y/y) declines in underlying earnings, attributing the softer results to a reduction in demand, as well as higher energy and input costs.  Lower y/y profitability is relative to a strong comparison in the prior year and overall the results indicate a return to more normalised levels from the outsized profitability seen in the prior eighteen months.
• Retail and Consumer Products companies are finally seeing lower shipping costs and a moderation of commodity pricing, but 3Q and 4Q earnings will likely continue to show inflationary pressures and rising prices, which are likely to drive further headwinds for consumers. We will continue to closely watch high yield issuers in these sectors for indications of the health of consumer demand and sector inventory levels.  As for inventories, recent guidance from Michael’s and Party City highlight how inventory management will differ across the space this holiday season: on the same day, Michael’s announced a shortage of inventory, while Party City announced higher than desired inventory levels.
• Some of the biggest headlines thus far in the earnings season have come from megacap technology companies, such as Meta (parent company of Facebook), and Alphabet (parent company of Google), which both disappointed relative to consensus expectations, and drove stock price declines that were picked up by the press. Both Meta and Alphabet are exposed to advertising, with Meta posting a 4% y/y decline in revenues, while Alphabet’s YouTube Ads segment saw a 2% y/y decline in revenues. We see limited read-through to advertising exposed issuers in the high yield market, with television station broadcasters, in particular, more reliant on the health of local advertising markets than big tech companies.  In addition, local television broadcasters will be bolstered by political advertising in both the third and fourth quarters in connection with the contentious US midterm elections.