This week, Bloomberg reported that the average real inflation-adjusted yield to maturity on the euro-denominated high-yield speculative corporate bond index fell negative for the first time in history. As the chart below shows, the average nominal yield to maturity on these riskiest corporate bonds, adjusted for the current inflation rate in the euro area, 3.0% year on year in August, is now around -0.7%.
Therefore, it is true that the so-called financial repression, i.e. negative real inflation-adjusted bond yields to maturity, are no longer present only on government bonds and safer investment-grade corporate bonds, but also in the most risky group of bonds, the so-called corporate high-yields. This is, of course, the result of the European Central Bank's unprecedented printing of fiat money in the tens of billions of euros a month under the quantitative easing program under which the European monetary authority constantly buys debt securities on the secondary market. Thanks to this ECB keeps bond market prices at all-time highs and at the same time correspondingly yields to maturity at all-time lows. Additionally on the other side of the Atlantic in the US, the situation is exactly the same.
Bond investors have it extremely complicated nowadays. We are trying to counter this unfavorable trend by focusing mainly on smaller issuers without an external rating from one of the large rating agencies (S&P, Moody’s, Fitch) within the European high-yield market. Today, these bonds carry, on average, a 2.5-3.0% yield premium over the euro high-yield index. Therefore, I believe that in the coming period we will be able to deliver our clients with a slightly positive real inflation-adjusted performance within our fund – Conseq high-yield bonds. However, whether the overall current situation on the global bond market is sustainable in the long run, when the average nominal global bond yield to maturity is only 1%, is another question.
Michal Stupavský
Investment Strategist at Conseq Investment Management, a.s.