1st Half 2019 Review
After experiencing the worst quarterly performance in over three years in the fourth quarter of 2018, the high yield market bounced back in 2019, particularly in the first quarter, generating the strongest first half performance since 2009. A major driver of this rebound in performance occurred at the beginning of the year when the U.S. Federal Reserve (“the Fed”) signaled a more accommodative monetary policy stance going forward.
1st Half 2018 Review
During the first half of 2018, high yield bonds produced a modest gain of 0.08% (as measured by the ICE BofA Merrill Lynch U.S. High Yield Bond Index (“HYBI”)), representing the worst first half performance by the asset class since the financial crisis of 2008.
2017 High Yield Market Review
For 2017, high yield bonds produced a gain of 7.48% (as measured by the ICE BofA Merrill Lynch U.S. High Yield Bond Index (“HYBI”)), representing the second consecutive year where the total return of the HYBI exceeded its start-of-the-year coupon. As reflected in Exhibit 1 below, strong gains during the first six months of the year largely drove high yield bond performance in 2017.
1st Half 2017 Review
During the first half of 2017, seemingly unwavering economic optimism and sustained accommodative monetary policy by many developed market central banks outside of the U.S. led to strong performance in the high yield market. This economic optimism, largely attributed to expected pro-growth policies from the new U.S. presidential administration, has continued largely unabated despite no significant new policies actually being implemented.
High yield bond performance in 2016 (as measured by the BofA Merrill Lynch U.S. High Yield Bond Index (“HYBI”)) recovered from early losses to post the asset class’s third highest annual total return during the past twenty years (17.49%), trailing only 2009 (57.51%) and 2003 (28.15%), respectively. As Exhibit 1 below shows, after generating an impressive gain of 9.32% through the first six months of the year, high yield bonds added an additional 7.47% in 2H16. High yield bond spreads compressed considerably in 2016, tightening a total of 273 basis points, including a 199 basis points decline in the second half of the year (“2H16”).
1st Half 2016 Review
In early 2016, concerns about global economic growth, including within the United States, placed pressure on commodity prices and resulted in a sell-off in the leveraged credit market. However, the market’s mood shifted as constructive news flow in the form of more accommodative monetary policy from central banks, improving economic conditions and a recovery in oil prices began to positively affect the psyche of market participants.
Transitioning through the Teens
Anyone who has parented a teenager has likely experienced a period of time like 2015 was for the leveraged credit market. The fifteenth year of this current century was rife with angst, wild mood swings, and insecurity, just like many kids endure around the same age. In fact, for much of the fourteenth year, the market behaved similarly, and our expectations are for a continuation of such patterns into 2016, which draws a relatable parallel to the transition that a person makes from child to young adult.
1st Half 2015 Review
After experiencing a tumultuous second half of 2014, high yield bonds and leveraged loans rebounded with solid returns in early 2015 before continuing their bumpy trend toward the end of the first half (“1H15”). The BofA Merrill Lynch U.S. High Yield Bond Index (“HYBI”) and the JP Morgan Leveraged Loan Index (“JPM”) returned 2.49% and 3.01%, respectively, beating all other U.S. domestic credit asset classes and even some major equity indices, including the S&P 500. Interestingly, the absolute return, yield, and spread of the market finished June virtually unchanged from year-end.
