High yield issuers are typically more dependent on growth, so a reflationary scenario makes the asset class relatively attractive. And while default risk remains a big fear, government support schemes and favourable financing conditions should help. Finally, as investors search for yield in 2021, high yield compares favourably to government bonds and investment grade credit.
The Backdrop for Euro High Yield
Markets have been volatile so far in 2021. Equities initially rallied to fresh highs before getting vertigo and retracing those gains. The creep of shutdowns, as a result of rising COVID-19 infections, has ensured weak economic growth to start the year; it is not quite the springboard that the market had anticipated. In addition, market volatility – largely a result of the GameStop shenanigans – has potentially caused some market participants to reduce their risk exposure.
Intermittent challenges to the orthodoxy that 2021 will be the year of the rebound are likely to continue to emerge, but the greater force is acting to support the economy. Growth should remain well underpinned by low central bank rates and ongoing asset purchases. Add to that substantial fiscal packages that have yet to feed through into demand. Furthermore, vaccine roll-outs should allow some reopening of the economy, which in turn would unleash pent-up consumer demand. While growth forecasts made in November 2020 may now appear optimistic, the most likely scenario remains a meaningful economic rebound in 2021.
In this context, we continue to favour European high yield bonds for three reasons:
Now Nine and Feeling Fine
On 3 February 2021, the SPDR® Bloomberg Barclays Euro High Yield Bond UCITS ETF celebrated its nine-year anniversary. Since inception, the ETF has generated an annualised return of nearly 5.5%.3 The fund has continued to gather assets recently, with inflows of around $100 million year to date, lifting the AUM above $1.1 billion. This larger size, coupled with buoyant secondary market activity, has allowed the five-day average bid-ask spread on the ETF to compress to just 11bp.4 Given the constructive backdrop for risk assets and the ongoing investor search for yield, we expect the SPDR® Bloomberg Barclays Euro High Yield Bond UCITS ETF to remain a key building block in investor portfolios, enhancing overall yield and helping to limit duration risk.
How to play this theme:
Investors looking to access European high yield exposure can do so through a SPDR ETF. To learn more about the ETF, and to view full performance history, please follow the link below:
Sources: Bloomberg Finance L.P., for the period 28 January – 4 February 2021. Flows are as of date indicated and should not be relied upon as current thereafter. This information should not be considered a recommendation to invest in a particular sector or to buy or sell any security shown. It is not known whether the sectors or securities shown will be profitable in the future.
1Source: Moody’s and Bloomberg. Data for Western Europe as of 3 February 2021
2Source: Bloomberg Finance L.P., as of 3 February 2021.
3Source: State Street Global Advisors, as of 3 February 2021.
4Source: State Street Global Advisors, Bloomberg Finance L.P., as of 3 February 2021.
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