'The most interesting issues should be sought among defensive securities'
Teva's 2030 bonds yield 5% with a 5-year duration, Telecom Italia Netcop's 2028 bonds yield 5% with a 3-year duration, as do Edf's 2027 callable bonds
3' min read
Key points
3' min read
Active management and long/short strategies, ranging between European and American high yield with an eye on defensive securities. Here is a summary of the indications of Nicolas Jullien, Head of High Yield & Credit Arbitrage at Candriam, a pioneer in sustainable investments since 1996, with some €145 billion in assets under management.
How do you expect to behave in bonds in the second half of the year? What are your expectations?
The tightening of credit spreads is behind us, so we believe it is time to increase selectivity to better focus on specific opportunities. This is because we believe that alpha will be the main driver of performance in the second half of the year. Regarding rates, the number of cuts priced in by the market is now more reasonable than at the beginning of the year, but they should remain volatile in the second half of the year as the outcome of the US elections could have significant implications for inflation and create uncertainty.
How much will central bank policies weigh?
Over the next six months they will become increasingly important as we approach the rate cuts expected by the market. The real problem for the ECB is the inversion of the rate curve, which makes its monetary policy less efficient. Short-term rates are restrictive, but only for small companies financing themselves with variable rates. While long-term rates are not restrictive and favour large companies.
In the past two years, the number of "rising stars" has far exceeded the number of "fallen angels", while it seems that, at least for the US, the downgrade risk is increasing and a large number of bonds will enter the high-yield segment. What impact could this have on the Hy market?
.Over the past two years, many companies have moved from high yield (Hy) to investment grade (Ig). This, together with strong demand for credit, has created a solid technical backdrop in the high yield markets. We expect this trend to reverse in the US, but the number of fallen angels should remain manageable. In the short term, this may weigh on the technical data, but it will broaden the investment universe and offer new opportunities.
With what risks?
Higher rates mean higher borrowing costs and as a result, most companies have shifted from being more equity-oriented to focusing more on credit growth. Their priority is therefore now debt reduction. On the positive side, companies with pricing power and solid free cash flow can reduce their debt levels and will see their ratios and credit ratings improve. On the other hand, after a decade of cheap liquidity, some companies have become over-indebted and some capital structures have become unsustainable in the new rate regime, with negative free cash flow. In a scenario of higher rates for longer, these capital structures will have to cope and default rates will remain around 4-5%.5
