Ready for a deluge of new high-yield issuance?

CONTRIBUTORS

Glenn Voyles, CFA

Corporate Credit Portfolio Manager
Franklin Templeton
United States

Jon Belk, CFA

Corporate Credit Portfolio Manager/Research Analyst
Franklin Templeton
United States

Colby McVey, CFA

Corporate Credit
Investment Director
Franklin Templeton
United States

Key takeaways

As the US Federal Reserve nears the end of its rate hiking cycle, we expect US high-yield issuers to tackle the refinancing of upcoming maturities from their pandemic-era issuances.
We believe the potential deluge of high-yield issuance presents challenges but also opportunities for active credit managers to add value.
Investors are well advised to prudently select performing credits based on issuer quality and to price idiosyncratic risks accordingly.

What does it all mean?

Against the backdrop of a potential increase in high-yield corporate bond issuance, we believe investment managers and prudent investors alike should be diligent in purchasing new issues while focusing on credit selection, quality and appropriate new issue pricing.

In our view, rates may be higher for an extended period as the FOMC seeks to avoid a repeat of previous high-inflation eras when rates were lowered prematurely before inflationary pressures fully subsided. While chief financial officers and corporate treasurers are generally holding off on issuing debt due to the expectations of lower rates later in 2024, our view of higher UST rates for a longer period of time should encourage them to issue debt sooner rather than later, as rates are not likely to decline rapidly, and current spreads should be appealing to issuers.

In light of these factors, we believe high-yield corporate bond managers are well advised to select performing credits based on the quality and durability of issuers’ business models and to price company-specific and new issue idiosyncratic risks accordingly. Skilled, active managers can bring considerable expertise to these tasks.

Franklin Templeton (FT) Fixed Income is here to help. Our active credit platform is part of the broader FT Fixed Income organization, allowing us to draw from the insights of more than 140 investment professionals responsible for managing over US$135 billion in assets. FT was a pioneer in the asset class and has a US high-yield track record dating back to 1969 (the beginning of the formation of the US high-yield market), making us one of the most tenured asset managers in the sector. Our emphasis is alpha generation through diligent fundamental credit research. Our active approach is driven by highest-conviction research ideas as a key alpha source. Our ability to manage duration, sector and security concentrations, combined with our longer-term investment horizon (3-5 years), allows us to be contrarian during bouts of volatility.

Read the full paper for background conditions, potential headwinds and what it all means.

WHAT ARE THE RISKS?

All investments involve risks, including possible loss of principal.

Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls. Low-rated, high-yield bonds are subject to greater price volatility, illiquidity and possibility of default. Changes in the credit rating of a bond, or in the credit rating or financial strength of a bond’s issuer, insurer or guarantor, may affect the bond’s value.

Equity securities are subject to price fluctuation and possible loss of principal.

Active management does not ensure gains or protect against market declines.

This document is intended to be of general interest only. This document should not be construed as individual investment advice or offer or solicitation to buy, sell or hold any shares of fund. The information provided for any individual security mentioned is not a sufficient basis upon which to make an investment decision. Investments involves risks. Value of investments may go up as well as down and past performance is not an indicator or a guarantee of future performance. The investment returns are calculated on NAV to NAV basis, taking into account of reinvestments and capital gain or loss. The investment returns are denominated in stated currency, which may be a foreign currency other than USD and HKD (“other foreign currency”). US/HK dollar-based investors are therefore exposed to fluctuations in the US/HK dollar / other foreign currency exchange rate. Please refer to the offering documents for further details, including the risk factors.

The data, comments, opinions, estimates and other information contained herein may be subject to change without notice. There is no guarantee that an investment product will meet its objective and any forecasts expressed will be realized. Performance may also be affected by currency fluctuations. Reduced liquidity may have a negative impact on the price of the assets. Currency fluctuations may affect the value of overseas investments. Where an investment product invests in emerging markets, the risks can be greater than in developed markets. Where an investment product invests in derivative instruments, this entails specific risks that may increase the risk profile of the investment product. Where an investment product invests in a specific sector or geographical area, the returns may be more volatile than a more diversified investment product. Franklin Templeton accepts no liability whatsoever for any direct or indirect consequential loss arising from use of this document or any comment, opinion or estimate herein. This document may not be reproduced, distributed or published without prior written permission from Franklin Templeton.

Any share class with “(Hedged)” in its name will attempt to hedge the currency risk between the base currency of the Fund and the currency of the share class, although there can be no guarantee that it will be successful in doing so. In some cases, investors may be subject to additional risks.

Please contact your financial advisor if you are in doubt of any information contained herein.

For UCITS funds only: In addition, a summary of investor rights is available from here. The fund(s)/ sub-fund(s) are notified for marketing in various regions under the UCITS Directive. The fund(s)/ sub-fund(s) can terminate such notifications for any share class and/or sub-fund at any time by using the process contained in Article 93a of the UCITS Directive.

For AIFMD funds only: In addition, a summary of investor rights is available from here. The fund(s)/ sub-fund(s) are notified for marketing in various regions under the AIFMD Directive. The fund(s)/ sub-fund(s) can terminate such notifications for any share class and/or sub-fund at any time by using the process contained in Article 32a of the AIFMD Directive.

For the avoidance of doubt, if you make a decision to invest, you will be buying units/shares in the fund(s)/ sub-fund(s) and will not be investing directly in the underlying assets of the fund(s)/ sub-fund(s).

This document is issued by Franklin Templeton Investments (Asia) Limited and has not been reviewed by the Securities and Futures Commission of Hong Kong.

Unless stated otherwise, all information is as of the date stated above. Source: Franklin Templeton.

CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.