On January 11, we published a "Chart of the Week" entitled "Things may be looking up for high-yield bonds" (see CotW from 1/11/19 ). We argued that spreads, especially those of European high-yield bonds, had widened too much. Per Wehrmann, Head of European High-Yield at DWS, said then that "we would expect spreads to tighten over the next 12 months".
Three months later, markets have recovered nicely. European high-yield spreads, which traded at a spread of 500 basis points compared to sovereign bonds at the turn of the year, have tightened to 380 basis points now. While this is still high compared to early 2018, Per Wehrmann does not want to become overly optimistic. The factors that many blame for contributing to the massive correction in financial markets in late 2018 remain present for the most part. Incoming economic data has so far failed to recover, especially in Europe. The auto sector’s woes have not abated. Markets are still waiting for a breakthrough in U.S.-China trade negotiations. The only major change is a U-turn in monetary policy. The Federal Reserve's (Fed’s) rate-hike cycle is switched from autopilot to wait-and-see, with a decent chance of no increase in policy rates at all this year.
Is it time to take some profits in European high-yield bonds? Wehrmann remains positive for the moment but stresses he is looking to shift down a gear in the months to come. Though low new issuance is supportive, "we have probably already seen most of the spread performance for the year," he says.
Sources: Bloomberg Finance L.P., DWS Investment GmbH as of 20/3/19