Viewpoints
So you think volatility will continue?

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 Stephen C. Concannon, CFAHigh Yield Portfolio Manager, Eaton Vance Management

      Boston - Volatile global markets are reacting to slowdown-induced weakness in earnings and fluctuating readings on economic growth in the developed world - along with the possibility that the Federal Reserve (Fed) and the European Central Bank (ECB) may move gradually on easing. Add to those pressures the ongoing uncertainty over global trade and simmering tensions in the Middle East, and yes, we think volatility will continue.

      State of the high-yield market

      Investors in high-yield bonds have been wary of bidding up the riskiest issues so far in 2019, typically preferring the higher-rated and less cyclical parts of the market. Valuations are tight relative to history and current fundamentals, especially in the U.S. From a global standpoint, we believe European markets offer more attractive relative value - particularly for U.S. companies issuing multicurrency capital structures.

      We expect positive U.S. economic growth, but at a more moderate pace. We believe fundamentals for high-yield issuers may weaken modestly as input costs rise and slower growth limits corporate profitability. Given potentially softer fundamentals and greater dispersion in earnings, we also anticipate a moderate uptick in defaults over the intermediate term.

      If we do see more interest rate cuts out of the Fed, which is our base case, we think that would be supportive for the asset class - unless the Fed's actions are insufficient to reignite underlying economic growth. In the near term, increased rhetoric around possible rate cuts could fuel rising demand for high-yield corporate bonds and stimulate a healthier primary issuance calendar.

      What we don't see is the U.S. and China reaching a deal that would be meaningful enough to dispel fears of a prolonged trade war. At the same time, the threat of U.S. tariffs on European goods remains. So we don't have a high level of confidence that we'll be able to overcome the trade-related obstacles to renewed global growth.

      Case for a defensive stance

      For at least a year, we've argued for a somewhat defensive approach within this asset class. Now we believe it would be appropriate to adopt an even more defensive stance, and we favor shorter-than-index duration in U.S. high yield. We find that short-dated paper tends to hold its value better during periods of volatility - as we saw during the risk sell-off in the fourth quarter of 2018. Whether short-maturity bonds or high-coupon bonds with a short first call date, the "pull to par" tends to limit the sell-off when spreads are widening or market technicals are weak.

      Bottom line: Unless we see the Fed follow through with significant cuts and a meaningful trade deal between the U.S. and China, which would spur a rebound in confidence and a renewal of global growth, we think continued volatility is the most likely path forward.