US high yield bonds face headwinds as inflation stalls: Nomura report

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According to a report published by Nomura, the US high yield bond market fell slightly in April, with the ICE BofA US High Yield Constrained Index (HUC0) down 1.0%, resulting in a year-to-date total return of 0.5. %. This decline can be attributed to the stagnation in the development of inflation and the associated rise in US Treasury yields.

Nomura’s report notes that although the U.S. experienced disinflation in the second half of 2023, the core PCE index returned to an annualized rate of 4% in the first quarter of 2024, indicating that inflation remains persistent. Emphasized. This has led to expectations that interest rates will continue to rise for an extended period of time, as the Federal Reserve is unlikely to cut rates until inflation subsides.

Rising U.S. Treasury yields, with the 10-year Treasury yield rising 48 basis points in April, are weighing on returns on high-yield bonds. His CCC-rated bonds underperformed during the month, with the cable TV sector experiencing the steepest decline due to issuer-specific activity.
Despite these challenges, the U.S. economy continues to grow steadily, with real final sales to domestic buyers increasing at an annual rate of 2.8% in the first quarter of 2024. This positive economic outlook is helping to keep high yield spreads in check.

“Looking forward, NCRAM feels that yields and carry will drive attractive total returns for high yield bonds this year, while evolving inflation remains the key driver for Fed policy and Treasury yields,” Nomura said. It will be a strength,” he said.
Europe’s high yields show resilience

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In contrast to the US market, European high yield bonds showed resilience in April, with the ICE BofA European Currency High Yield Constrained Index (HPC0) returning -0.02% year-to-date and 1.89% year-to-date. During the month, while spot high-yield bonds remained relatively stable, foreign bond yields rose, causing spreads to tighten on BB-rated bonds.

Europe’s economy is showing signs of recovery from a period of negative growth, and although inflation remains persistent, the trend suggests the ECB could cut interest rates in June. Technical factors also continue to support European high yield, with modest new issuance activity and ample cash available to absorb new supply.

“New issuance increased at the end of April as issuers moved forward with refinancing plans for maturities in 2025 and 2026, given the healthy capital market,” Nomura said.

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