![\"\"](\"https:\/\/latribune.lazardfreresgestion.fr\/wp-content\/uploads\/2022\/12\/Chart-of-the-week-0912-Blog-300x133.png\")
<\/p>\nIn just one year, yield to maturity (YTM) levels for European high yield rose from 3% to over 8% before retracing to 7.3% at the start of this month. Behind the upward move is a rise in the risk-free rate (currently around 2%) and higher spread levels (around 5%). While high yield has performed negatively for the past year, expected yields are now significantly more generous.<\/p>\n
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The increase in high yield spread levels means a higher probability of default in the segment. Moody\u2019s suggests that in the 12\u00a0months up to the end of next October, the default rate could reach 4%. This compares with 2.5% over the past 12\u00a0months and 1.3% in 2021. While investors have already priced in higher default risk, deteriorating economic conditions in the next 12\u00a0months could result in a higher-than-expected default rate of up to 5\u20136% including partial defaults.<\/p>\n
If this scenario were to materialise, then we would expect yields and\/or spreads to increase accordingly. However, debt holders would be cushioned from the negative effects by generous yields. As things stand, only a cumulative rise in yields and spreads of around 240\u00a0bps (2.4%) would offset the 12\u00a0month performance currently being posted by high yield. We believe this to be an unlikely scenario and aside from any short-lived peaks, risk premia are not set to remain at such elevated levels.<\/p>\n
Against this backdrop, the high yield segment seems to be back in favour with investors. Following record outflows of \u20ac12.6 billion \u2013 15% of AuM \u2013 from European high yield funds between January and October 2022, the tide has turned in recent weeks with inflows of \u20ac209 million from 17\u201323 November and \u20ac48 million from 24\u201330 November*.<\/p>\n
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* Source: J.P. Morgan, European Credit Fund Flows.<\/p>\n
The opinion expressed above is dated December 9, 2022 and is subject to change.<\/p>\n
See also: https:\/\/latribune.lazardfreresgestion.fr\/en\/eurozone-inflation-has-become-broad-based\/<\/p>\n
***<\/p>\n
This document is not pre-contractual or contractual in nature. It is provided for information purposes. The analyses and descriptions contained in this document shall not be interpreted as being advice or recommendations on the part of Lazard Fr\u00e8res Gestion SAS. This document does not constitute an offer or invitation to purchase or sell, nor an encouragement to invest. This document is the intellectual property of Lazard Fr\u00e8res Gestion SAS. LAZARD FRERES GESTION \u2013 a simplified joint stock company with share capital of \u20ac14,487,500 \u2013 Paris Trade and Companies Registry No. 352 213 599. 25, RUE DE COURCELLES \u2013 75008 PARIS, FRANCE<\/p>\n","protected":false},"excerpt":{"rendered":"
Chart of the Week In just one year, yield to maturity (YTM) levels for European high yield rose from 3%… <\/p>\n","protected":false},"author":101016,"featured_media":18907,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[148],"tags":[1940,1971],"class_list":["post-18911","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-chart-of-the-week","tag-inflation-en","tag-usa-en"],"yoast_head":"\n