2020 Mid-Year Outlook: High Yield Bonds

Timely insights from portfolio managers and industry experts on key financial, economic and political issues.

The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Eaton Vance disclaims any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Eaton Vance are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Eaton Vance strategy. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness.

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      By Jeffrey D. MuellerCo-Director of High Yield Bonds, Portfolio Manager, Eaton Vance Advisers International Ltd.

      Boston - Fundamental research is the key to investing in high yield.

      So far 2020 has been a year of significant volatility in the high yield asset class. And as we look out over the second half of the year, we would expect that that theme of volatility is going to remain.

      We've been focusing on doing fundamental credit research and reaching out to our portfolio companies to speak with management teams, to get a better understanding of what exactly those management teams are seeing out there in the real world. And we'd expect that earnings trends will most likely trough in the next couple of quarters. And I think parsing through those companies who will have their earnings inflecting and have their credit profiles improving, versus those that will remain subdued, is going to be key to unlocking value as we move forward in this market.

      We've also seen default rates rise, and in the US they ended May right near 5%, although they've remained stubbornly low in Europe, a little bit below 2%. But as we look out to the rest of 2020, we'd expect that default rates will continue to rise and we'll most likely in the year at or near 10% levels.

      We also continue to keep a close eye on some of the wider issues in the world that could affect risk markets as we move forward — whether that be the rising tensions between the US and China and the upcoming US presidential election, which is in November. And probably most importantly, the eventual path, depth and duration of the current global pandemic that we're in.

      So while the market has been supported by impressive levels of stimulus that we've seen from central banks and governments around the world, we are cognizant that not all lights are green. And there could be additional volatility ahead for high yield and other asset classes.

      A focus within our high yield strategies remains on building portfolios of individual securities that we expect will help us capture as much of the eventual upside that the current valuation opportunity represents, while avoiding those higher levels of credit impairment that we believe may be yet to come.