High yield valuations imply significant economic slowdown

Fixed income markets suffered in June another painful month. For example, high yield bonds are down -7.3% and -16.7% YTD, the worst half-year performance since the global financial crisis in 2008. The sell-off this year has been deep, but the pattern has not matched that of previous ones as it was primarily driven by higher rates/input costs. The high yield market has seen significant outflows YTD from ETFs and retail funds of nearly USD 35 bn, the highest on record. US high yield bond spreads “ex-energy” trade now in the cheapest decile since ~10 years and offer a YTW close to ~9% p.a. A further increase would anticipate a severe recession ahead.

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