The U.S. and European high yield markets produced modest gains in the first quarter, delivering 1.4% in the United States and 1.9% in Europe for the three-month period ended March 31, 2021. High yield’s positive return was in contrast to the negative performance of most fixed income sectors, which were weighed by rising interest rates, heightened expectations for economic growth, recovering commodity prices, and the introduction of a nearly $2.0 trillion fiscal stimulus package in the United States.
In the U.S., high yield bond spreads returned to 2018 levels, declining 38 basis points during the quarter to end at 406 basis points, while yields touched a record low of 4.53% in mid-February before closing March at 4.72%. Spreads in Europe trended similarly, compressing 33 basis points over the three-month period to settle at 325 basis points at quarter-end. In both regions, lower-quality outperformed during the quarter: CCC-rated bonds returned 3.8% in the U.S. and 4.9% in Europe, while BBs returned -0.3% in the U.S. and 1.1% in Europe. Energy and pandemic-sensitive sectors such as transportation and gaming/leisure led performance in the U.S. market.
Following more than $140 billion of defaulted high yield debt during 2020, which ranked as the second-highest annual total on record, only six companies defaulted on a combined $3 billion of debt in the first quarter of 2021, the third-lowest quarterly total in the past five years. With this, the U.S. high yield default rate declined to 5.4% including energy, and fell further to 3.1% excluding energy. In Europe, only two companies defaulted during the quarter, resulting in a trailing 12-month default rate of 3.5% at the end of March.
U.S. high yield issuance reached a record $159 billion in the first quarter of 2021, exceeding the prior peak of $146 billion achieved in the second quarter of last year. Of note, March produced the highest monthly volume of all-time, while January was the third-highest level on record. Refinancing represented more than 75% of primary volume and was the largest use of proceeds for the eleventh consecutive month, as borrowers continued to take advantage of strong investor demand for new issuance. In Europe, after setting a calendar-year record in 2020, high yield primary issuance marked a quarterly record in the opening three months of the year, with new supply of €45 billion topping the previous peak by approximately €12 billion.
Following more than $44 billion of new capital inflows in full year 2020, U.S. high yield funds reversed trend in the first quarter of 2021, recording over $10 billion of outflows during the three-month period, as credit investors shifted new capital deployment toward floating-rate loan funds. European high yield retail fund flows declined €1.4 billion over the quarter.
For more information on Distressed Debt, visit angelogordon.com/strategies/credit/distressed-debt/
Developed market yields declined to 20-year lows.
Volumes are down significantly from 2020 levels.
Spreads between bond qualities have declined to pre-pandemic levels.
Primary volume reached record levels in the first quarter of 2021.