Vice-President, Global Fixed Income, CIBC Asset Management
Credit rating agencies, they rate a company's credit quality on a scale of roughly one to twenty. So if you just go right down the middle at 10, anything above the midpoint is investment grade and anything below the midpoint is high-yield. And what we found is one of the great opportunities is right there in that crossover area.
What’s behind the recent high-yield rally?
2018 was probably the bottom of the market for both equities and for high-yield, and they've rallied since then. So it doesn't look like this bubble that you might be hearing about. If we look towards the end of 2018, central banks became more dovish and bond investors started to price in a higher probability of easy monetary policy. And there was really two concerns that the central banks had. The first one was the geopolitical risks. If you think about the trade wars, Brexit.
Inflation likely to stay low
The second concern that they had was low inflation, and I think inflation has been low and it will continue to stay low for quite some time, and that's because of technology. Most consumers now are walking around with a smartphone and that smartphone is empowering them. The smartphone is basically a mobile price discovery device. So it's really having an effect on retail prices. And going further down the road, once we are introduced to 5G wireless technology, Internet of Things, smart cities, artificial intelligence, autonomous driving - I think all of this momentum in technology is really going to keep a lid on inflation and prices.
High-yield new issue supply is changing
If we go back to the previous financial crises, most of the new issues that were coming to the marketplace were to fund leveraged buyouts and those leveraged buyouts were very highly levered. So you had a majority of these leveraged buyouts coming into the primary market that's new supply, and because they were so highly levered, many of the new deals were even rated triple C. But if you look at today's primary market, most of the issuance is just simply to refinance existing debt. So it's leverage neutral in terms of the whole market, primarily. And also when companies are extending maturities, it's actually an improvement in credit quality and an improvement in their credit profile.
Negative bond yields across the world
Bond yields - they're negative in many parts of the world. For example, the broad European bond market, the average yield is 0.25%. And when we look at all of the bonds within that marketplace, within that benchmark index, half of the bonds are trading at a negative yield. And that includes many corporates. So when we look at that and then we turn and look at U.S. corporate credit, investment grade in the U.S. is around 3.25%. High-yield is closer to 6%. So we think that going forward, as long as these global bond yields stay low, and even in negative territory, I think we're going to continue to see these bond investors look for some sort of positive yield and North American credit, both investment grade and high-yield, is one of the places where they can find it.