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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: