US high yield bond segment could face some pressure

WHILE most other major fixed income segments are posting losses on a year-to-date basis, the US high yield bond space has managed to thus far retain its year-to-date gains of 1.6 per cent (in US dollar terms). While this may seem paltry in absolute terms, it represents a sizeable outperformance over/against other fixed income segments.

Over the past three years, US high yield has been one of the strongest-performing segments of fixed income, following the plunge in oil prices between late 2014 to early 2016 which caused carnage in the shale gas industry, and in turn sparked a blow-out in spreads (risk premium) for US high yield. This blow-out in spreads set the base for the next three years of strong returns. US high yield delivered a very handsome cumulative return of 28 per cent from the beginning of 2016 to Oct 22, 2018 in US dollar terms.

The outperformance of the US high yield segment thus far in 2018 has come on the back of tightening credit spreads, driven in part by rising risk free rates as well as a domestic economy that continues to be driven by supercharged fiscal stimulus.