Heading into 2023, the consensus narrative appeared set. The Federal Reserve had embarked on an aggressive interest rate hiking cycle to combat spiralling inflation. A US recession was expected to follow, as household excess savings built up during the pandemic were exhausted and corporate borrowing conditions tightened dramatically after the benign post-global financial crisis era of low interest rates.
KEY POINTS
- The US economy continues to surpass expectations while the high yield bond market has enjoyed a strong period of performance
- High yield companies have access today to more diversified sources of capital than ever, including private credit markets
- The public high yield bond market and private credit market could together offer borrowers a potential holistic investment lifecycle, optimising pricing and financing costs
High yield (HY) companies, according to many outlooks, were among the most exposed to this shifting backdrop and were expected to struggle to adjust as the economy deteriorated and banks pulled back from lending. Refinancing options in capital markets for existing debt burdens were also now expected to become significantly more expensive.
Tighter lending standards have often been correlated with US recessions, as demonstrated by the chart below. As a result, there were fears the US HY market default rate would also spike as companies struggled to cope with these headwinds.
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