Going global with high yield: bank runs have been denting market confidence

Apr 18, 2023

Claudio Da Gama Rose, Bluebay Institutional Portfolio Manager, Global Leveraged Finance team, RBC BlueBay Asset Management, dissects the banking sector in the current environment and what it means for the global high yield market.

We are encouraged that the volatility induced by the turmoil in the banking sector eased towards the end of March and continues to do. We would argue that the problems leading to the demise of SVB and Credit Suisse respectively, have been a function of specific factors, and that unlike 2008, there should not be a reason to fear more widespread fallout across the global banking sector. However, lending standards will continue to tighten, leading to more restrictive financial conditions. This is likely to act as a brake on economic activity as we move through the year and we currently expect a relatively mild recession on both sides of the Atlantic, from around the turn of the year.

Banking blues

March was an eventful month with wild price swings in financial markets in both rates and credit with market confidence being dented by bank runs in both Europe and the US. An overweight positioning to financials remains a core view across our high yield platform, though we have reassessed our risk position and reduced exposure to off-benchmark AT1.

Notwithstanding this risk management decision, we continue to reflect that the operating environment for European banks is as good as it has been for the past 15 years, and with rates rising, this is improving net interest margins and boosting banks’ profitability. From this point of view, we retain a constructive outlook on banks and on subordinated debt issues, which offer attractive value.

Banking sector stress

Moody’s is becoming more bearish on defaults as the banking sector stress, further tightens lending conditions and weakens US and European growth rates.

Actual and forecasted US and European default rates

Chart showing actual and forecasted US and European default rates

Source: Moody’s Investor Services as at 23 March 2023

Going global with high yield

Despite global high yield spreads widening by 47 basis points, the huge rally in front-end rates and positive income effects, helped the benchmark return for global high yield markets staying in positive territory up +0.62% in March. The positive return backdrop returned delivered in Q1 demonstrates the merits of investing in a high yielding asset class. We continue to believe that global high yield can deliver positive returns despite rising credit stress and weakening growth rates. The starting quality of fundamentals and strong technical factors give us conviction that the asset class can continue to bounce back this year.

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