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Market View I High Yield Monthly Update

Views from our High Yield investment boutique, NCRAM

February 3, 2025

David Crall, CFA
CEO & CIO, Nomura Corporate Research and Asset Management Inc.


US High Yield

US high yield returned 1.38% in January, according to the ICE BofA US High Yield Constrained Index (HUC0). The US high yield market had a bullish tone to start the year as investors took comfort in solid growth trends and Core PCE inflation heading down towards a 2% annualized rate in Q4. In addition, hopes for tax cuts and deregulation from the Trump administration exceeded fears about disruption, and positive sentiment about investment helped the S&P 500 hit an all-time high. US Treasuries rallied modestly from 4.57% to 4.54% on the 10-year, while high yield performed well across the ratings spectrum, and spreads tightened. Telecom, Broadcasting, and Cable TV were among the best performing sectors in the market overall, while Entertainment and Containers lagged. Utilities, the sector most tied to AI in high yield, also lagged as the Chinese AI model DeepSeek threatened to reduce expected power needs for AI. US high yield ended the month with a yield of 7.17% and spread of 268 bps.

At this time, the Trump administration is only two weeks old, there is clearly a large appetite for change, and the full impact is difficult to determine. Over the weekend, Trump announced tariffs on Mexico, Canada, and China which in the near term will disrupt sectors including food and autos. There remains uncertainty about the milestones Trump requires to rescind tariffs, as well as future tariffs. The administration is also taking a close look at domestic and foreign spending, immigration, and other areas. Some actions can be taken by the executive branch, but some will require Congress, and some may face court scrutiny. We will actively parse the various initiatives as they emerge.

European High Yield

The European high yield market returned 0.55% (EUR, unhedged) in January, as measured by the ICE BofA European Currency High Yield Constrained Index (HPC0). The European high yield market started the year softly, while the Bund also continued its sell-off, peaking at 2.46%. However, as the inauguration of President Trump passed with no immediate tariffs applicable to Europe, and the credit markets remained resilient even during the DeepSeek-inspired equity sell-off, European high yield quickly gained traction, and we saw a very strong rally going into the end of January. Additionally, the ECB remained somewhat dovish as they cut rates another 25 bps, citing progress with inflation and weaker economic expectations in major regions of the Eurozone. The market expects three to four more hikes in 2025, with the bulk coming in the first half. The European high yield rally was broad-based, and even included some out-of-favor sectors such as autos. The new issue market saw only a handful of names come to the market to refinance their debt. As a result, demand was strong, and final pricing tightened meaningfully versus initial expectations, as most new issues traded higher. Spreads tightened by 6 bps during the month, with CCCs outperforming. The outlook for European high yield remains solid, as default rates are expected to stay low in 2025, and rates should act as a tailwind for high yield returns, even as spreads remain relatively tight.

Emerging Markets 

EM hard currency debt markets posted returns of roughly 1% in January, with high yield credits outperforming. EM Sovereign bonds, as measured by the JPM Emerging Markets Bond Index Global (EMBIG), gained 1.23% in January, with high yield credits up 1.94% while investment grade credits gained 0.67%. A similar trend was seen in EM Corporates, which gained 80 bps during the month, according to the JPM Corporate Emerging Market Bond Index Broad Diversified (CEMBI BD), with high yield credits outperforming with a 1.03% gain, while investment grade corporates lagged at 63 bps. New supply in January was dominated by investment grade credits, but capital markets were open for high yield issuers absent from the primary market for a while, such as Egypt. Technical factors should continue to be supportive for EM hard currency bonds in 2025 on relatively low net new issuance and prospects for a low default rate.

 

Disclosures
This document is prepared by Nomura Corporate Research and Asset Management Inc. (NCRAM) and is for informational purposes only.
All information contained in this document is proprietary and confidential to NCRAM. All opinions and estimates included herein constitute NCRAM’s judgment, unless stated otherwise, as of this date and are subject to change without notice. There can be no assurance nor is there any guarantee, implied or otherwise, that opinions related to forecasts will be met. Certain information contained herein is obtained from various secondary sources that are believed to be reliable, however, NCRAM does not guarantee its accuracy and such information may be incomplete or condensed. Historical investment performance is no guarantee of future results. There is a risk of loss. Strategy performance references are based on gross of fees performance.
Certain information contained in this document contains forward-looking statements including future-oriented financial information and financial forecasts under applicable securities laws (collectively referred to herein as forward-looking statements). Except for statements of historical fact, information contained herein constitutes forward-looking statements. Although NCRAM believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, it can give no assurance that forward-looking statements will prove to be accurate. These statements are not guarantees of future performance and undue reliance should not be placed on them. Forward-looking information is subject to certain risks, trends, and uncertainties that could cause actual performance and financial results in future periods to differ materially from those projected. NCRAM undertakes no obligation to update forward-looking statements if circumstances or NCRAM’s estimates or opinions should change.
This document is intended for the use of the person to whom it is delivered. Neither this document nor any part hereof may be reproduced, transmitted or redistributed without the prior written authorization of NCRAM. Further, this document is not to be construed as investment advice, or as an offer to buy or sell any security, or the solicitation of an offer to buy or sell any security. Any reproduction, transmittal or redistribution of its contents may constitute a violation of the U.S. federal securities laws.
Performance data is calculated by NCRAM based upon market prices obtained from market dealers and pricing services or, in their absence, an estimate of market value based on NCRAM’s pricing and valuation policy. Performance data stated herein may vary from pricing determined by an advisory client or by a third party on behalf of the advisory client. Performance data set forth herein is provided for the purpose of facilitating analysis of account assets managed by NCRAM, and should not be used for the purpose of reporting or advertising performance of specific account portfolios to account beneficiaries or to third parties.
An investment in high yield instruments involves special considerations and certain risks, including risk of default and price volatility, and such securities are regarded as being predominantly speculative as to the issuer’s ability to make payments of principal and interest.
A copy of NCRAM’s Code of Ethics and its Part 2A of Form ADV are available upon request by contacting NCRAM’s Chief Compliance Officer via e-mail at [email protected] or via postal mail request at Nomura Corporate Research and Asset Management Inc., Worldwide Plaza, 309 West 49th Street, Compliance Department, Attn: Chief Compliance Officer, New York, NY 10019-7316.
The views and estimates expressed in this material represent the opinions of NCRAM and are subject to change without notice and are not intended as a forecast or guarantee of future results. Such opinions are statements of financial market trends based on current market conditions. The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only, and is not intended to provided, and should not be relied upon as legal or tax advice.
The contents of this document are not intended in any way to indicate or guarantee future investments results as the value of investments may go down as well as up. Values may also be affected by exchange rate movements and investors may not get back the full amount originally invested.  Before purchasing any investment fund or product, you should read the related prospectus and / or documentation in order to form your own assessment and judgement to make an investment decision.  This report may not be reproduced, distributed or published without the written permission of Nomura Asset Management U.K. Limited.  Nomura Asset Management U.K. Limited is authorised and regulated by the Financial Conduct Authority.

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