Neuberger Berman: Why high yield is on its way back

Current weaknesses in the high yield market are temporary and the asset class could be heading for a “rapid” rebound, according to Neuberger Berman portfolio manager for non-investment grade credit Dan Doyle.

In the last weeks of July, billions of dollars were pulled out of the global high yield market with a record $7.1bn (£4.2bn) coming out of US high yield bond funds. All in all, the global high yield market suffered the worst outflows since the ‘taper tantrum’ of 2013 as investors took flight amid mounting geopolitical tensions in Ukraine, Iraq and Gaza.

Doyle says: “Without question, geopolitical worries could remain elevated. And the high yield market, like all asset classes, is susceptible to non-fundamentals driven volatility. What’s more, lower dealer inventories of high yield bonds have removed a buffer, which had historically dampened fund-driven movements in the market.”

However Doyle expects high yield to rebound quickly due to the fundamental strength of companies and risks already being priced into the debt.

He explains: “We are hard pressed to see a scenario where defaults significantly increase over the next 18-24 months. The economy’s weather-induced weakness is already in the rearview mirror. And given the large amount of refinancing activity, many companies have reduced their borrowing costs and extended maturities.”

Doyle predicts the turnaround of high yield could be quick and adds: ”Last June, the Fed’s discussion of tapering resulted in $16bn in outflows, only to be followed by more than $6bn in inflows the very next month.

”Once the current geopolitical issues fade, we anticipate a similar improvement in technicals and a rebound for the overall high yield market.”