The impact of COVID-19 on high yield debt

In a world famished for income, high yield has been one of the last bastions for those seeking a form of income which resembles a decent return. It has been quite a journey to today’s levels however it wasn’t always this way.  The risk of liquidity has mounted its head in the recent years. This refers to the fact that a number of bond issues may not trade regularly for weeks, months and even years. This lack of liquidity issue has become more serious as a result of the recent decade policy of abysmally low base interest rates. The recent market retreat has laid bare this situation, with central banks intervening on the buy side to create liquidity. This lack of liquidity was however visible from last year, when the repo market ran into difficulties requiring the intervention of the Federal Reserve. Investing in bonds is always about being adequately rewarded for the level of risk on a credit being undertaken. In this regard two main forces are shaping the market. First is that, as a result of the long stimulus programmes, many of the debtholders have been pushed out of sovereign and high-grade debt, a term known as overcrowding. Second is that, given the significant increase in...