Global High Yield markets remained under pressure throughout April and into May as several factors combined to undermine investor comfort with the outlook for the sector. Specifically, the impact of persistently elevated inflation on corporate profit margins was a concern, along with the growth impact of tightening financial conditions.
There was also some distress in certain Healthcare and Retail issuers. With recession risk rising in the US, albeit from very low levels, as well as the slower growth outlook elsewhere, in China and eurozone particularly, the macro outlook remained challenging.
The high yield market did see a sharp rebound in the last week of May, as the elevated valuations and a peak in rates volatility attracted investors and enabled the market to retrace approximately 35% of the spread widening year to date.
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Bonds generally present less short-term risk and volatility than stocks, but contain interest rate risk (as interest rates raise, bond prices usually fall); issuer default risk; issuer credit risk; liquidity risk; and inflation risk. These effects are usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.
Investing in high yield fixed income securities, otherwise known as “junk bonds”, is considered speculative and involves greater risk of loss of principal and interest than investing in investment grade fixed income securities. These Lower-quality debt securities involve greater risk of default or price changes due to potential changes in the credit quality of the issuer.
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