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Tuesday 20 December 2022
December 2022| In every calendar year following a year of negative US high yield returns, high yield bonds posted positive returns. In this paper, we analyze the seven negative years of high yield bond returns to determine the reason for this positive performance – and consider what this could mean for investor portfolios in 2023.
01 | In each year immediately following a year with negative performance, the US high yield market has always generated a positive return.
02 | We analyze the potential factors contributing to this phenomenon, including default rate, inflation, the federal funds rate, and the unemployment rate.
03 | While we cannot offer a definitive conclusion, investors may wish to consider this historical performance pattern as they consider allocations to high-yield bonds in 2023.
Unless otherwise stated, all information contained in this document is from Amundi Asset Management US (Amundi US) and is as of December 20, 2022. Diversification does not guarantee a profit or protect against a loss. The views expressed regarding market and economic trends are those of the author and not necessarily Amundi US and are subject to change at any time based on market and other conditions, and there can be no assurance that countries, markets or sectors will perform as expected. These views should not be relied upon as investment advice, a security recommendation, or as an indication of trading for any Amundi product. This material does not constitute an offer or solicitation to buy or sell any security, fund units or services. Investment involves risks, including market, political, liquidity and currency risks. Past performance is not a guarantee or indicative of future results. Amundi Asset Management US is the US business of the Amundi Asset Management group of companies.
The most striking takeaway from the Federal Open Market Committee is the near uniformity among FOMC members that the terminal level for rates will exceed 5%. It appears the lower-than-expected October and November Consumer Price Inflation data was not enough to change members' views. Debt ceiling considerations are likely to make the cash balance that the US Treasury holds at the Fed very volatile, leading to reserve volatility. If it leads to money market disruptions, it would be a sign that the supply of reserves in the system is approaching scarcity and could halt the balance sheet run-off.
While we are bearish on the outlook for home prices, we are bullish on the outlook for mortgage defaults. Importantly, we do not expect a repeat of the housing crisis of 2008, nor a surge in distressed sales. This is because the vast majority of today’s borrowers have fixed-rate mortgages, and mortgage modifications are heavily prioritized over foreclosure. However, we do expect declines in home prices of roughly 15% over the next three years, with the majority of the decline occurring in 2023.
We predict that 2023 will be a two-speed year, with plenty of risks to watch out for. Bonds are back, market valuations are getting more attractive, and a Fed pivot in the first part of the year could trigger interesting entry points. We expect global growth to slow significantly, with several countries across both developed markets and EM suffering stagnation, while others may face a slowdown at best.
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Securities offered through Amundi Distributor US, Inc.
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