Boston - Eaton Vance and its affiliates seek to actively capitalize on opportunities presented by uncertainty about future market and economic outcomes, while ensuring that the portfolio risk profile remains appropriate for the specific strategy. Here are excerpts from a recent conversation with Stephen C. Concannon, CFA, Co-Director of High Yield Bonds and Portfolio Manager for Eaton Vance Management.
What we are seeing: Over the course of a 10-week rally post crisis, we saw the high yield spread over Treasurys tighten into the mid-500s before widening modestly in the second week of June to 632 basis points. By June 19, spreads tightened into 606 and the average yield-to-worst ended at 6.45%.
Looking back to May for context, the rally stalled briefly in the first half before beginning to heat up once again in the second half. We are all familiar with most of the reasons — namely, promising results in COVID-19 vaccine trials, a rebound in oil prices, ongoing stimulus from central banks and the expectation for more on that front. Most recently, we've seen a few key economic indicators post decent numbers.
In the second week of June, however, risk markets gave back some recent gains on concern over the pickup in new cases of COVID-19 in a number of states. The high yield market cooled alongside equities, but then the Fed stepped in again last week, this time after only a couple of days of moderate weakness.
The Fed had been purchasing high yield ETFs through their Secondary Market Corporate Credit Facility (SMCCF) for some time. Then on June 15, policymakers announced that on the following day, they would begin buying a "broad and diversified mix of individual corporate bonds."
What we are doing: We have been encouraged by the Fed's recent efforts. By keeping the mix broad and diversified, the SMCCF program does not require the issuers' certification, which is typically needed for the Fed to purchase individual bonds in the Primary and Secondary Market Corporate Credit Facility. We think this lets policymakers keep a foot on the gas pedal and adjust it at their own rate, without having to rely on individual issuers to certify eligibility.
The high-yield market now has experienced $47.7 billion of net inflows over the trailing 12-week period. To put that in perspective, from 2009 to 2012, total inflows into the asset class were just short of $89 billion. Gross issuance is up 57% year-over-year and net issuance is up 89%. The good news is that there has been plenty of demand to soak up that activity. Our market is up about 11.5% over the course of the second quarter, so despite the pandemic and the record sell-off in the first quarter, the year-to-date total return has narrowed to -3.22%.
What we are watching: We are watching the fundamentals of high yield issuers. According to JPMorgan, aggregated first-quarter earnings indicate that the average high yield issuer experienced revenue growth of -3% and earnings before interest, taxes depreciation and amortization — or EBITDA — growth of -7%. Meanwhile, average leverage increased to 4.5 times debt/EBITDA and average interest coverage decreased to 4.4 times EBITDA/interest expense.
Final word: We expect the degradation in the fundamentals of high yield issuers to persist through the second quarter and into the third quarter. However, the high yield market has been buoyed by recent action from the Fed. This ongoing intervention by the US central bank has continued to provide stability to financial markets and put downward pressure on credit spreads in high yield.