US high yield - Keep calm and carry on - Barclays Private Bank · 35. Barclays Bank PLC Monaco...
2
Overview – Investors should take advantage of the currently benign macro environment to take carefully calibrated credit risk – Historically, long carry strategies tend to outperform in low volatility environments – Our lead indictors 1 are consistent with default rates remaining contained for now Search for yield With the 10-year G7 government bond yielding just slightly north of 1%, positive inflation-adjusted returns look hard to come by in the higher quality corners of the fixed income complex. A still benign inflation backdrop, a multi-decade bull run in interest rates and the lingering monetary policy hangover from the most serious recession (and financial crisis) in living memory are just some of the factors that explain these historically low yields. We are certainly expecting the backdrop to become a little less friendly for higher quality bonds. Central bankers are rightly becoming less lenient (particularly in the US) for a start. However, with inflationary forces still in abeyance, we expect this normalisation to be glacial relative to past rate rising cycles. In such a context, PBOS Investment Division still sees investors being rewarded for taking carefully calibrated credit risks (Figure 1). Figure 1 – Low yield environment Carry – a time-tested strategy Historically, long carry strategies – that is, being long a higher yielding asset while being short a similar low yielding asset – have generated consistent outperformance over time. These carry strategies have tended to outperform in benign market regimes like the one we still find ourselves in now. The US economy is enjoying robust growth, supported by buoyant consumer spending. Given the upbeat state of the ISM Manufacturing Index (our preferred lead indicator for the US business cycle), PBOS Investment Division expects growth momentum to persist into next year, leading to lower default risk for the dicier parts of the US credit market. US high yield debt looks attractive to us from a risk/reward perspective. Current fundamentals High yield spreads have recovered from their February blow out, to sit more or less where they started the year. Total returns for the overall market are fractionally positive as a result. The heavy issuance within the higher yielding segments that we’ve seen over the course of this cycle may present a risk if growth slows or fundamentals deteriorate, however this is not currently on the cards according to our lead indicators. There are also growing concerns about valuations in the High Yield complex; however while the economic backdrop likely remains benign, defaults should remain reasonably contained. Risks We note that long carry strategies are vulnerable to sharp near- term drawdowns when wider market conditions turn. High yield bonds tend to exhibit a higher frequency of ‘fat-tail’ losses in their return distributions, despite having better risk-adjusted returns than equities over the long term. Hence, this particular strategy is only suitable for long-term investors with a high tolerance for drawdown risk. The other point to make is that this is a sub asset class where selection can reap significant dividends over passive access. Source: FactSet PBOS Investment Division April 2018 1 ISM manufacturing and US 2 – 10 yield curve Investments can fall as well as rise in value. Your capital or the income generated from your investment may be at risk. US high yield – Keep calm and carry on Private Bank 0 1 2 3 4 5 6 Global convertibles - lower tier 2 - tier 1 - senior Euro IG banking US IG banking Euro high yield US high yield Yield to worst (%) 0.5 2.8 2.9 5.8 0.4 0.0 0.9 1.3
Transcript of US high yield - Keep calm and carry on - Barclays Private Bank · 35. Barclays Bank PLC Monaco...
Overview – Investors should take advantage of the currently benign macro environment to take carefully calibrated
credit risk– Historically, long carry strategies tend to outperform in low volatility environments – Our lead indictors1 are consistent with default rates remaining contained for now
Search for yieldWith the 10-year G7 government bond yielding just slightly north of 1%, positive inflation-adjusted returns look hard to come by in the higher quality corners of the fixed income complex. A still benign inflation backdrop, a multi-decade bull run in interest rates and the lingering monetary policy hangover from the most serious recession (and financial crisis) in living memory are just some of the factors that explain these historically low yields. We are certainly expecting the backdrop to become a little less friendly for higher quality bonds. Central bankers are rightly becoming less lenient (particularly in the US) for a start. However, with inflationary forces still in abeyance, we expect this normalisation to be glacial relative to past rate rising cycles. In such a context, PBOS Investment Division still sees investors being rewarded for taking carefully calibrated credit risks (Figure 1).
Figure 1 – Low yield environment
Carry – a time-tested strategyHistorically, long carry strategies – that is, being long a higher yielding asset while being short a similar low yielding asset – have generated consistent outperformance over time. These carry strategies have tended to outperform in benign market regimes like the one we still find ourselves in now. The US economy is enjoying robust growth, supported by buoyant consumer spending. Given the upbeat state of the ISM Manufacturing Index (our preferred lead indicator for the US business cycle), PBOS Investment Division expects growth momentum to persist into next year, leading to lower default risk for the dicier parts of the US credit market. US high yield debt looks attractive to us from a risk/reward perspective.
Current fundamentalsHigh yield spreads have recovered from their February blow out, to sit more or less where they started the year. Total returns for the overall market are fractionally positive as a result. The heavy issuance within the higher yielding segments that we’ve seen over the course of this cycle may present a risk if growth slows or fundamentals deteriorate, however this is not currently on the cards according to our lead indicators. There are also growing concerns about valuations in the High Yield complex; however while the economic backdrop likely remains benign, defaults should remain reasonably contained.
RisksWe note that long carry strategies are vulnerable to sharp near-term drawdowns when wider market conditions turn. High yield bonds tend to exhibit a higher frequency of ‘fat-tail’ losses in their return distributions, despite having better risk-adjusted returns than equities over the long term. Hence, this particular strategy is only suitable for long-term investors with a high tolerance for drawdown risk. The other point to make is that this is a sub asset class where selection can reap significant dividends over passive access.
Source: FactSet
PBOS Investment Division April 2018
1ISM manufacturing and US 2 – 10 yield curve
Investments can fall as well as rise in value. Your capital or the income generated from your investment may be at risk.
US high yield – Keep calm and carry on
Private Bank
0 1 2 3 4 5 6
Global convertibles
- lower tier 2
- tier 1
- senior
Euro IG banking
US IG banking
Euro high yield
US high yield
Yield to worst (%)
0.5
2.8
2.9
5.8
0.4
0.0
0.9
1.3
DISCLAIMER
This communication is for Barclays Private Bank and Overseas Services customers.
This document is from the Investments division at Barclays Private Bank & Overseas Services (“PBOS”) division and is not a product of the Barclays Research department. Any views expressed may differ from those of Barclays Research. All opinions and estimates are given as of the date hereof and are subject to change. No representation is made as to the accuracy of the assumptions made within, or completeness of, any modelling, scenario analysis or back-testing. Barclays is not responsible for information stated to be obtained or derived from third party sources or statistical services. Barclays is not offering to sell or seeking offers to buy any product or enter into any transaction. Any offer or entry into any transaction requires Barclays’ subsequent formal agreement which will be subject to internal approvals and execution of binding transaction documents. Any past or simulated past performance including back-testing, modelling or scenario analysis contained herein is no indication as to future performance. Neither Barclays nor any of its directors, officers, employees, representatives or agents, accepts any liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this communication or its contents or reliance on the information contained herein, except to the extent this would be prohibited by law or regulation. The value of any investment may also fluctuate as a result of market changes. Barclays is not obliged to inform the recipients of this communication of any change to such opinions or estimates. THIS COMMUNICATION IS PROVIDED FOR INFORMATION PURPOSES ONLY AND IT IS SUBJECT TO CHANGE. IT IS INDICATIVE ONLY AND IS NOT BINDING.
This document is not directed to, nor intended for distribution or use by, any person or entity in any jurisdiction or country where the publication or availability of this document or such distribution or use would be contrary to local law or regulation. It may not be reproduced or disclosed (in whole or in part) to any other person without prior written permission. You should not take notice of this document if you know that your access would contravene applicable local, national or international laws. The contents of this publication have not been reviewed or approved by any regulatory authority. Barclays offers private and overseas banking, credit and investment solutions to its clients through Barclays Bank PLC and its subsidiary companies. Barclays offers private and overseas banking, credit and investment solutions to its clients through Barclays Bank PLC and its subsidiary companies. Barclays Bank PLC is authorized by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority and is a member of the London Stock Exchange and NEX. Registered in England. Registered No.1026167. Registered Office: 1 Churchill Place, London E14 5HP.
This document was drafted by and the views presented are those of Barclays Bank (Suisse) SA as of the date of the brochure and may be subject to change in the future. The information contained in this document is intended for general circulation only. This document shall not constitute advice or an offer by Barclays Bank (Suisse) SA to subscribe to any service or product or enter into any transaction. All legal terms and conditions are to be found in the general account terms and conditions of Barclays Bank (Suisse) SA together with the legal terms and conditions of the product or service offered. Barclays Bank (Suisse) SA has made every effort to ensure that the information contained in this document is reliable, exhaustive and accurate. This document is general in nature and does not take into account the specific investment objectives, financial situation, knowledge, experience or particular needs of any particular person. The products and services presented in this publication may not be appropriate or suitable for all investors. Advice should be sought from a financial adviser regarding the appropriateness and suitability of the investment products and services mentioned herein, taking into account your specific objectives, financial situation, knowledge, experience and particular needs before you make any commitment to purchase any such investment services or related products. Neither Barclays Bank (Suisse) SA nor any of their respective officers, partners or employees accepts any liability whatsoever for any direct or consequential loss arising for any use of or reliance upon this publication or its contents, or for any omission.
Barclays Bank (Suisse) SA is a Bank registered in Switzerland and regulated and supervised by FINMA. Registered No. CH-660.0.118.986-6. Registered Office: Chemin de Grange-Canal 18-20, 1224 Chêne-Bougeries, Switzerland. Registered branch: Beethovenstrasse 19, P.O. Box, 8027 Zurich. Registered VAT No. CHE-106.002.386.
In the Principality of Monaco, Barclays Bank PLC operates through a branch which is duly authorised and falls under the dual supervision of the Monegasque regulator ‘Commission de Contrôle des Activités Financières’ (with regards to investment services) and the French regulator ‘Autorité de Contrôle Prudentiel et de Résolution’ (in respect of banking services). The registered office of Barclays Bank PLC Monaco branch is located at 31 avenue de La Costa, MC 98000 Monaco – Tel. + 377 93 15 35 35. Barclays Bank PLC Monaco branch is also registered with the Monaco Trade and Industry Registry under No. 68 S 01191. VAT No. FR 40 00002674 9.
Barclays Bank PLC (DIFC Branch) (Registered No. 0060) is regulated by the Dubai Financial Services Authority. Barclays Bank PLC (DIFC Branch) may only undertake the financial services activities that fall within the scope of its existing DFSA licence. Principal place of business: Private Bank, Dubai International Financial Centre, The Gate Village Building No. 10, Level 6, PO Box 506674, Dubai, UAE.
Barclays Bank PLC, Guernsey Branch is licensed by the Guernsey Financial Services Commission under the Banking Supervision (Bailiwick of Guernsey) Law 1994, as amended, and the Protection of Investors (Bailiwick of Guernsey) Law 1987, as amended. Barclays Bank PLC, Guernsey Branch has its principal place of business at Le Marchant House, St Peter Port, Guernsey, GY1 3BE.
Barclays Bank PLC, Jersey Branch is regulated by the Jersey Financial Services Commission. Barclays Bank PLC, Jersey Branch is regulated by the Guernsey Financial Services Commission under the Protection of Investors (Bailiwick of Guernsey) Law 1987 as amended. Barclays Bank PLC. Jersey Branch has its principal business address in Jersey at 13 Library Place, St Helier, Jersey JE4 8NE, Channel Islands.
Barclays Bank PLC, Isle of Man Branch is licensed by the Isle of Man Financial Services Authority. Barclays Bank PLC, Isle of Man Branch has its principal business address in the Isle of Man at Barclays House, Victoria Street, Douglas, Isle of Man, IM99 1AJ.
IBIM7729 May 2018
