High-yield bonds are often thought of as the “canary in the coal mine” because trouble in high-yield markets can sometimes be an early warning signal for other asset classes. By most measures, high-yield bonds had held up fairly well only falling about 2% year-to-date through March 6. But as was the case with essentially all risk assets, losses in high-yield bonds accelerated dramatically on March 9. Although the high-yield canaries aren’t singing right now, they aren’t choking either.

Liquidity

Liquidity—which is generally lower for high yield than investment grade—has deteriorated, but not to the point where it has caused real issues. There is no new issuance this month and quotes are wide. Many high-yield funds, SEI included, appear to have cash to cover rising outflows. Exchange-traded funds and credit-default swaps have also been a source of funding for outflows, limiting the need to sell actual bonds. While these are all signs of stress, high-yield markets are still orderly and manageable. Outflows would really have to ramp up from here for our portfolios to become forced sellers.

Performance has been Diverse

High-yield market performance has varied widely by sector, with energy suffering from reduced oil demand and a fierce battle for market share between Saudi Arabia and Russia, at the expense of prices.

Unsurprisingly, leisure has also fared poorly in a world of COVID-19-related quarantines and travel bans.

Conversely, telecommunications and healthcare (which are two larger high-yield sectors) along with bank loans (which are above bonds in the capital structure, and typically BB rated floating-rate instruments) have fared much better. This dynamic may persist for a bit.

High-yield spreads have moved considerably wider this year, some of which is deserved—particularly in the case of energy, where default risk has certainly risen. In other sectors, the spread widening has been more a case of “guilt by association.” We continue to cautiously look for opportunities, keeping in mind the lower levels of liquidity in high-yield markets and the potential for significant outflows if investors begin to panic.

Defaults and Downgrades

Defaults have been near historically low levels so there is certainly room for them to rise in a time of stress. There may be more “fallen angel” opportunities than usual if we see a number of downgrades of BBB rated securities. Sectors that are the most performance challenged right now, notably energy, are the most at risk for defaults and downgrades. Managers have indicated that they are looking to add risk, particularly in affected areas, when it makes sense.

Positioning and Outlook

We have not made any significant positioning changes to our high-yield portfolios. The bulk of assets, as always, are in higher rated B and BB rated issuers. Portfolios are diversified across sectors without taking major sectors bets, while allowing managers to focus on individual credit selection. Energy will likely remain challenged until oil prices normalise, but other sectors should fare better. We believe this dislocation may provide a buying opportunity to selectively add risk and remind investors that rash decisions to hastily sell based on short-term performance challenges often generate poor long-term results.

Important Information

The opinions and views in this commentary are of SEI only and are subject to change. They should not be construed as investment advice.

Investments in SEI Funds are generally medium- to long-term investments. The value of an investment and any income from it can go down as well as up. Investors may get back less than the original amount invested. Returns may increase or decrease as a result of currency fluctuations. Past performance is not a reliable indicator of future results. Additionally, this investment may not be suitable for everyone. If you should have any doubt whether it is suitable for you, you should obtain expert advice.

The SEI Global Assets Fund Plc, SEI Global Investments Fund Plc, and SEI Global Master Fund Plc (the “SEI Funds”) are structured as open-ended collective investment schemes and are authorised in Ireland by the Central Bank as a UCITS pursuant to the UCITS Regulations. The SEI Funds are managed by SEI Investments, Global Ltd (“SIGL”). SIGL has appointed SEI Investments (Europe) Ltd (“SIEL”), an affiliate of SIGL, (together “SEI”) to provide general distribution services in relation to the SEI Funds either directly or through the appointment of other sub-distributors. The SEI Funds may not be marketed to the general public except in jurisdictions where the funds have been registered by the relevant regulator. The matrix of the SEI fund registrations can be found here seic.com/GlobalFundRegistrations.

No offer of any security is made hereby. Recipients of this information who intend to apply for shares in any SEI Fund are reminded that any such application may be made solely on the basis of the information contained in the Prospectus. This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any stock in particular, nor should it be construed as a recommendation to purchase or sell a security, including futures contracts.

In addition to the normal risks associated with equity investing, international investments may involve risk of capital loss from unfavourable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Bonds and bond funds are subject to interest rate risk and will decline in value as interest rates rise. High yield bonds involve greater risks of default or downgrade and are more volatile than investment grade securities, due to the speculative nature of their investments. Narrowly focused investments and smaller companies typically exhibit higher volatility. SEI Funds may use derivative instruments such as futures, forwards, options, swaps, contracts for differences, credit derivatives, caps, floors and currency forward contracts. These instruments may be used for hedging purposes and/or investment purposes.

While considerable care has been taken to ensure the information contained within this document is accurate and up-to-date, no warranty is given as to the accuracy or completeness of any information and no liability is accepted for any errors or omissions in such information or any action taken on the basis of this information.

This information is issued by SEI Investments (Europe) Limited, 1st Floor, Alphabeta, 14-18 Finsbury Square, London EC2A 1BR which is authorised and regulated by the Financial Conduct Authority. Please refer to our latest Full Prospectus (which includes information in relation to the use of derivatives and the risks associated with the use of derivative instruments), Key Investor Information Documents and latest Annual or Semi-Annual Reports for more information on our funds. This information can be obtained by contacting your Financial Adviser or using the contact details shown above. SEI sources data directly from FactSet, Lipper, and BlackRock, unless otherwise stated.