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Analysing the past: high-yield spreads and forward-looking returns

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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. and Stephen C. Concannon, CFACo-Director of High Yield Bonds, Portfolio Manager, Eaton Vance Management

      London - Credit spreads blowing out past 800bps is a rare phenomenon in high-yield corporate bond markets. With that said, these bouts of volatility have historically created brief entry points to capitalise on attractive tactical opportunities.

      Using the US high-yield market as the example case, the blue boxes in the chart below show the six- and 12-month forward returns from the vantage point of various peaks in credit spreads over the past 19-plus years. As readers can see, the potential for double-digit total returns on a forward-looking basis increased significantly as credit spreads widened to levels that are consistent with those we are currently seeing in today's market.

      High-yield spreads and subsequent forward returns

      SpreadsForwardLookingReturns1

      Source: ICE BofA US High Yield Index as of 24 March 2020. Past performance is not a reliable indicator of future results. Data provided are for informational use only. It is not possible to invest directly in an Index.

      Rather than looking at single point figures, the table below shows the analysis for all available data points where credit spreads have exceeded 800bps. For example, on a three-year time horizon, the average annualised total return for US high yield, beginning when index credit spreads were wider than 800bps, would be 14.2% with high and low returns of 23.7% and 9.2%, respectively.

      High-yield annualised returns (%) as spreads exceed 800bps

      SpreadsForwardLookingReturns2

      Source: ICE BofA US High Yield Index as of 24 March 2020. Past performance is not a reliable indicator of future results. Data provided are for informational use only. It is not possible to invest directly in an Index.

      Bottom line: The uncertainty related to the COVID-19 pandemic may cause spreads to widen further from current levels. That said, we believe that today's spread levels may present an attractive entry point for investors who take a judicious approach to credit selection and seek to allocate on a longer-term investment horizon.