2020 Outlook: US High Yield

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

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      By Kelley G. BacceiHigh Yield Portfolio Manager, Eaton Vance Management

      Boston - When we look across the US high yield market, we think that selection is going to be very important in 2020.


      Sources of volatility

      We expect volatility to increase in 2020 due to the amount of uncertainty that's in the market. Whether it's trade policy or the election year — and the dichotomy between policies that are being presented by the Republicans and the Democrats — we can see a lot of uncertainty causing volatility in the market.

      Geopolitical uncertainties have been feeding into the energy markets, which have been quite weak on both the demand side and the supply side. The energy sector is particularly significant in high yield, representing about 14% of our index. So movements in oil this year can be a risk to both the upside and the downside.

      We certainly expect that that kind of gyration can continue within 2020, and we probably will see a good portion of the defaults this year coming from those distressed energy names.

      Technicals and fundamentals of high yield

      In a very low interest rate environment, we think that investors are still going to need yield in their portfolios, and therefore the supply-demand picture should remain sound in 2020.

      We believe that we have already seen the peak of earnings growth within this cycle. So that's in the rear view mirror. However, we still believe that fundamentals are relatively benign: Leverage has held in at a reasonable level compared to historical averages. Interest coverage, giving credit to the US Federal Reserve, has certainly held in at historic highs.

      Bottom line: We do think that growth has moderated, but slow growth can be supportive of the US high yield market.