Volatility Rates Little Seen In HY So Far

Volatility in interest rates year-to-date has unevenly impacted credit markets. Investment grade credit (IG) weakened in sympathy with sovereign yields, especially in high quality and long duration paper. IG bonds were down -3.6% in the U.S. year-to-date, and -0.5% in Europe where rates volatility was lower, with backing from the ECB’s purchases. In contrast, HY has been resilient, still up +1.6% in the U.S. and +2.5% in Europe, supported by about 60 bps of spread tightening, especially in riskiest HY tranches, as well as in energy in the U.S. and in materials in Europe. We review how L/S HY managers on both sides of the Atlantic manage rate volatility and where they concentrate their fire power.