Credit Investments Group Quarterly Spotlight with UBS Asset Management
Lead — Instability in the private credit space is shifting attention back to high-yield bonds, making this a potential opportunity for institutional investors. Per the full note source, the maturity and liquidity of high-yield as an asset class could make it an attractive alternative in the current environment. With over $10 billion traded daily in the U.S. markets, high-yield bonds offer a level of volatility that, while present, appears less harmful compared to some private credit structures. There's mounting evidence that a flight back to traditional credit will gain momentum as market players reassess risk. Looking forward, the lack of scheduled high-impact events may keep the discussion centered around the adaptability and resilience of established credit markets.
What the desk is arguing
The desk posits that high-yield bonds may regain focus as private credit experiences increased volatility and liquidity concerns. Per the full note source, high-yield has demonstrated resilience, yielding steady returns and an active trading environment. With approximately $10 billion in daily trading volume, the desk believes this asset class stands as a cornerstone of portfolio diversification amidst uncertainty.
This perspective is fortified by the perception that traditional high-yield bonds have historically shown lower risk-adjusted returns compared to other credit instruments like private lending. It is crucial for institutional traders to recognize this shift as more than just a trend but as a foundational change in market behavior driven by these uncertainties.
Where it sits in our coverage
Our consensus target for high-yield bonds sets key benchmarks for both short- and long-term evaluations: - JPMorgan with a target of 1.10 (Mar26) - BofA with a more conservative target of 1.04 (Mar26)
This view of high-yield bonds aligns with a growing consensus among institutional traders who are becoming increasingly wary of the private credit landscape, especially as sentiment contrasts with BofA's more cautious outlook. The desk also notes that current factors align solidly in the mid-range of upcoming projections.
How other firms see it
Firms such as JPMorgan lean towards more optimistic valuations for high-yield bonds, considering them a reliable asset in turbulent times. However, BofA maintains a more conservative view, suggesting caution given the evolving credit landscape.
Market indicators such as the spread between high-yield bonds and investment-grade securities, as well as the U.S. Treasury yield curve, will be critical to monitor for any shifts that could correlate with changes in high-yield appetite.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01High-yield bonds are experiencing a revival as private credit markets show volatility.
- 02Daily trading volume in high-yield bonds indicates robust liquidity and market interest.
- 03The mature nature of the high-yield market supports its attractiveness amidst shifting investor sentiment.
Market implications
Watch for indicators in the high-yield bond space, particularly the trading volumes that indicate liquidity and investor sentiment shifts. Any change in the federal interest rate policy or macroeconomic indicators could accelerate interest in high-yield over private credit alternatives.
Risks to this view
Should market conditions worsen or if there is increased uncertainty around rate hikes from the Federal Reserve, high-yield bonds could experience a sell-off. An unexpected surge in default rates or downgrades in credit ratings could also damage the high-yield market's appeal significantly.
We are back now with the Credit Snapshot with UBS Asset Management for today's episode. Glad to be joined by two portfolio managers from the Credit Investments Group at UBS Asset Management, Michael Adelman as well as Matt Iannucci. Joining us as well, Eileen Liu, Head of the U.S.
Client Portfolio Management Team at UBS Asset Management. So for today, Eileen will guide the conversation with Mike and Matt, focusing on recent market developments within high-yield bonds and broader credit markets. So thank you, everyone, for joining us today.
Eileen, let me now turn it over to you. Thanks, Ken. We're excited to be here today.
Our team has been managing non-investment-grade credit, think loans, bonds, CLOs, since the late 90s, and we've continued to see credit evolve. It's been an exciting journey, but we'd really like to focus specifically on the high-yield asset class today. So I'll start with you, Mike.
Perhaps I'm a little biased here, but private credit seems to be the only credit being discussed these days. So why do you think high-yield has not received the same level of attention, and what do you think are client concerns? Yeah, hey, Eileen, I think you're right.
High-yield isn't getting the same level of attention as private credit, but I think that speaks to one of its more attractive features. It's a mature asset class. It's been around for a long time.
It's produced steady, risk-adjusted returns for decades, and right now, no news is good news the way we see it. One of private credit's big initial selling points in recent years has been low volatility, but we know it's been a rough patch for some of the semi-liquid and more retail-oriented products in that space. High-yield, admittedly, has shown some periods of volatility too, but it's liquid.
You can get money in and out of the asset class fairly efficiently. There's over $10 billion traded daily in the U.S. in cash bonds and plenty more in high-yield linked derivatives, and that activity can give investors confidence in high-yield asset valuations. What do we hear from clients around their concerns around the asset class?
Look, I think folks think of high-yield under its other moniker, junk bonds. I'm no marketing whiz, but we really should have tried harder to shake that nickname a long time ago. The fact is, today, the asset class is as clean as it's ever been.
It's heavily weighted towards public companies that are taking less balance sheet risk, and as a result, distressed activity is well below long-term averages, and credit fundamentals remain solid. Thanks, Mike. I agree with you on the junk bonds point.
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