Following the rally on credit markets during Q4 2023, more than a third of US High Yield keeps trading at credit spreads below 200bps over risk-free rates. On a risk-adjusted basis, such spreads remain tight from a historical perspective, especially when a challenging macroeconomic outlook is considered. While overall a yield of 8% on US HY corporate market remains attractive compared to long term averages, there is an increasing dispersion among HY issuers. The differences in HY corporates fundamentals and outlooks, combined with higher refinancing costs due to FED’s ongoing tight monetary policy, present opportunities for active credit investors.
In particular, the portfolio managers capable of extracting idiosyncratic opportunities on both long (undervalued) and short positions (overvalued with tight credit spreads) stand to benefit from the current environment.