Market View High Yield Monthly Update

US High Yield

The US high yield market returned -2.49% in September, dropping the YTD total return to 0.04%, according to the ICE BofA US High Yield Constrained Index (HUC0). US high yield succumbed to the massive repricing in the US Treasury market, as the yield on the 10-year Treasury increased by 54 bps to 5.29%, and the yield on the 5-year Treasury increased by 59 bps to 5.09%. We believe Treasuries have repriced primarily due to the growth effects of the AI boom – as the hyperscalers continue to report that the demand for computing power exceeds the supply, they are planning to increase their investment spending for the next few years. As this spending underpins the overall economy, the market has recognized that the Fed will need to adjust rates to steer inflation back toward 2%, and rates will be “higher for longer.” During September, the market was expecting two rate hikes by the end of 2027, ending at 4% to 4.25%. At the end of September, after one hike during the month, expectations were adjusted to four more hikes by the end of 2027, ending at 4.75% to 5%. Views that Fed Chair Warsh would be reluctant to raise rates have been set aside, as his language tends to be hawkish. Notably, the backup in rates is a global phenomenon, as the AI boom competes for capital all around the world.

In the face of rising rates, the S&P 500 was relatively stable, supported by the AI-linked parts of the market, while segments of the equity market with more interest rate sensitivity were down, such as the Russell 2000 (down 5%). Within high yield, spreads widened by 49 bps, and CCCs were down the most, on the same logic that overall growth will be supported by AI, but higher rates may slow parts of the economy. Heavy supply also weighed on spreads. September saw total issuance of $51.7bn, including $36.3bn net new supply, an all-time high for monthly net volume. The best performing sectors in the market, with the least decline, included Entertainment, Publishing, and Technology, while the weakest sectors were Cable TV, Broadcasting, and Insurance. The US high yield market ended the month with a yield of 8.30% and spread of 312.

Looking forward, we believe the yield increases across fixed income have created an attractive buying opportunity in fixed income in general and US high yield in particular. The AI boom has pushed up yields, but this theme could moderate in 2027 and suppress yields if demand for AI falters, and there are other sources of possible economic uncertainty that could lead investors back to Treasuries. We think the advent of the chatbot Muse, which is cutting costs for consumers, points to the deflationary impacts of AI which could help limit Fed hikes. With regard to US high yield, although higher rates will slow certain sectors, the overall market has a high average rating and defaults should remain muted, while the 8.3% yield provides solid income to support an attractive return for the risk.

Global High Yield

The global high yield market returned -2.26% in September, bringing the YTD return to 0.73%, as measured by the ICE BofA Global High Yield Index (HW00), in USD hedged terms. After having tightened in the face of rising rates in both the US and Europe, the market suffered from rising rates in September. The ongoing uncertainty over the Iran conflict, combined with hawkish messaging from both the Fed and ECB, led to continued rates weakness and a substantial bear flattening of the rate curves as investors priced in additional hikes and “higher for longer” rates. In both major geographies, economic growth seems to be holding well, adding fuel to the concerns over inflation. Given the bearish environment, spreads widened, ending September around 312 bps versus 270 bps at the end of August.

While there was some slight decompression between BB and B credits, performance for both ratings segments was similar given the longer duration in the higher quality bucket. CCCs underperformed on weak market sentiment. By region, Europe outperformed as the inflation picture seems to be more benign and dependent on a resolution to the Iran conflict. Oil prices appeared to stabilize at the end of the month, which helped the Bund outperform Treasuries. In the US and EM markets, Treasuries were the key factor given the 5-year Treasury sold off 59 bps to 5.09%. AI headlines continued to be a major driver of market risk as concerns over AI safety led to uncertainty over future growth assumptions for datacenter development, and also the release of Meta’s chatbot Muse put pressure on legacy subscription-based businesses such as insurance brokers, cable, and media. During the month, P&C Insurance, Air Transportation and Cable & Satellite TV were the weakest sectors in the market, while Theaters & Entertainment outperformed on AMC’s capital structure refinancing.

With both the European and US markets expecting three to four more rate hikes through 2027, a “higher for longer” rate environment is currently being priced into the high yield markets. Q3 earnings season is set to start in October, and how companies and consumers are weathering the increase in energy costs, interest rates, and global geopolitical uncertainty will determine the direction of risk for the markets. While we continue to expect significant new issuance, the two mega deals that came to market in September should remove a technical overhang, and with investors somewhat more discerning on new issues, hopefully we see more attractive value coming in the new issue market in the short term. High yield remains well-situated in the current market, with low duration and high quality. At the current yield to worst of 7.95%, all-in yields appear attractive, and the asset class is positioned to generate strong absolute returns for investors in the long term.

IMPORTANT INFORMATION

This document was prepared by Nomura Corporate Research and Asset Management Inc. (NCRAM) and is issued and distributed by Nomura Asset Management Europe KVG mbH – UK Branch.

All information contained in this document is proprietary and confidential to NCRAM. All opinions and estimates included herein constitute NCRAM’s judgment, unless stated otherwise, as of this date and are subject to change without notice. There can be no assurance nor is there any guarantee, implied or otherwise, that opinions related to forecasts will be met. Certain information contained herein is obtained from various secondary sources that are believed to be reliable, however, NCRAM does not guarantee its accuracy and such information may be incomplete or condensed. Historical investment performance is no guarantee of future results. There is a risk of loss. Strategy performance references are based on gross of fees performance.

Certain information contained in this document contains forward-looking statements including future-oriented financial information and financial forecasts under applicable securities laws (collectively referred to herein as forward-looking statements). Except for statements of historical fact, information contained herein constitutes forward-looking statements. Although NCRAM believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, it can give no assurance that forward-looking statements will prove to be accurate. These statements are not guarantees of future performance and undue reliance should not be placed on them. Forward-looking information is subject to certain risks, trends, and uncertainties that could cause actual performance and financial results in future periods to differ materially from those projected. NCRAM undertakes no obligation to update forward-looking statements if circumstances or NCRAM’s estimates or opinions should change.

This document is intended for the use of the person to whom it is delivered. Neither this document nor any part hereof may be reproduced, transmitted or redistributed without the prior written authorization of NCRAM. Further, this document is not to be construed as investment advice, or as an offer to buy or sell any security, or the solicitation of an offer to buy or sell any security. Any reproduction, transmittal or redistribution of its contents may constitute a violation of the U.S. federal securities laws.

Performance data is calculated by NCRAM based upon market prices obtained from market dealers and pricing services or, in their absence, an estimate of market value based on NCRAM’s pricing and valuation policy. Performance data stated herein may vary from pricing determined by an advisory client or by a third party on behalf of the advisory client. Performance data set forth herein is provided for the purpose of facilitating analysis of account assets managed by NCRAM, and should not be used for the purpose of reporting or advertising performance of specific account portfolios to account beneficiaries or to third parties.

An investment in high yield instruments involves special considerations and certain risks, including risk of default and price volatility, and such securities are regarded as being predominantly speculative as to the issuer’s ability to make payments of principal and interest.

A copy of NCRAM’s Code of Ethics and its Part 2A of Form ADV are available upon request by contacting NCRAM’s Chief Compliance Officer via e-mail at compliancenomuraasset@nomura.com or via postal mail request at Nomura Corporate Research and Asset Management Inc., Worldwide Plaza, 309 West 49th Street, Compliance Department, Attn: Chief Compliance Officer, New York, NY 10019-7316.

The views and estimates expressed in this material represent the opinions of NCRAM and are subject to change without notice and are not intended as a forecast or guarantee of future results. Such opinions are statements of financial market trends based on current market conditions. The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only, and is not intended to provided, and should not be relied upon as legal or tax advice.

The contents of this document are not intended in any way to indicate or guarantee future investments results as the value of investments may go down as well as up. Values may also be affected by exchange rate movements and investors may not get back the full amount originally invested. Before purchasing any investment fund or product, you should read the related prospectus and / or documentation in order to form your own assessment and judgement to make an investment decision. This report may not be reproduced, distributed or published without the written permission of Nomura Asset Management U.K. Limited. Nomura Asset Management U.K. Limited is authorised and regulated by the Financial Conduct Authority.

Market View High Yield Monthly Update

US High Yield

Global High Yield

Disclosures

Policies

US High Yield

Global High Yield

Disclosures

Policies

​

Market View High Yield Monthly Update

US High Yield

Global High Yield

​

​

US High Yield

Global High Yield

Disclosures

Policies