Kames cuts energy exposure as high-yield default rates rise

The energy and mining sector have pushed US high-yield default rates to their highest rate since August 2012, new data shows. 

Data from JP Morgan shows that the US high-yield default rate rose to 1.92 per cent in July from 1.89 per cent at the end of June, the highest since 2.21 per cent in August 2012.  

“Recent default activity has been dominated by energy and mining companies,” say Kames High Yield Global Bond Fund managers Phil Milburn and Claire McGuckin. Energy companies accounted for 42 per cent of default volumes in the year to date, while coal companies accounted for 27 per cent. 

“At Kames, we remain of the view that core default rates are unlikely to increase materially in the current economic environment, but noise around specific challenged sectors will continue,” say the duo.

The managers reduced their energy exposure at the end of April, anticipating a correction. 

“This scenario played out in a much more dramatic fashion than we expected, with another significant drop in oil prices and corresponding impact on US high-yield energy names,” said the duo. However, there appears to be little contagion spreading to other high-yield markets. 

“Excluding the volatile energy sector, the remainder of US high yield was more stable, and [year to date] returns are much closer to those of European high yield despite renewed focus on the timing of the expected Federal Reserve rate hike,” say Milburn and McGuckin.

In Europe markets have recovered from the 11th hour deal in Greece, meaning high-yield has rallied, say the Kames managers. 

European high-yield returns are 3 per cent, with single-B names driving performance in the first half of the year, returning 4.7 per cent year to date. In contrast, BB have returned 2.49 per cent and CCC have returned 0.9 per cent.

”Given the renewed weakness in energy bonds discussed below, [year to date] European high yield is outperforming US high yield,” say Milburn and McGuckin.

Kames high yield table