Current Environment in high yield

Opportunity in high yield still exists given attractive spreads and lower interest rate sensitivity 

Fundamentals

  • Corporate balance sheets remain healthy and supportive of the high yield market
  • Companies continue to refinance qt lower rates and extend debt maturity profile
  • Default rates remain around 1%, still well below historical averages (4%)

Technicals

  • Retail fund flows have been negative for the year but have been positive recently
  • Interest rate sensitivity has increased as spreads have tightened and rate volatility has increased
  • Capital market activity has been robust due to strong demand and low interest rates
  • While new issuance is rending more toward mower rated, refinancing nedds are still the primary use of proceeds

Valuations

  • Spreads (+495 bps) are cheap to fundamentals and wider than comparable periods of below average defaults. High yield still provides attractive risk/return trade-off relative to other fixed assets
  • We expect positive returns for the balance of 2013 but limited price appreciation; excess returns are likely to remain strong but nominal returns could be impacted by a rise in rates

Source : J.P.Morgan Asset Management

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