Investors rotated out of a euro-denominated high yield ETF last week in a sign of growing concerns about the rise in default rates this side of the pond.
Tracking the Markit iBoxx Euro Liquid High Yield index, IHYG has returned -4.3% this year, as of 27 July. It currently tracks 573 euro-denominated securities with 17.6% exposure to Italy, 16.2% to the US and 12.9% to France.
The outflows come after European high yield bond default rates doubled to 2.4% in H1, up from 1.2% at the end of 2019, according to Fitch Ratings.
The ratings agency has predicted default rates in this asset class will hit 5% by the end of the year following the impact of coronavirus on European economies.
The firm also expected European economy GDPs to contract by over 8% this year which will in turn impact “operating cash flow and corresponding leverage and liquidity profiles for many European high-yield issuers”.
“The improvement in capital market conditions supported the return of primary market activity, led by active refinancing from businesses in resilient sectors such as telecoms and healthcare,” Fitch Ratings continued.
“However, recent issuance from riskier unsecured primary LBO issuers and from stressed issuers seeking additional liquidity and maturity extensions demonstrated a broader return of risk appetite.”
Default rates have been even higher in the US, especially in the energy and retail sectors which reached 5.1% in June.
One way to play the rising default rates is through the recently launched Tabula North American CDX High Yield Credit Short UCITS ETF (TABS) which is the first ETF in Europe to offer short exposure to the North American high yield market.
As Tabula Investment Management’s CEO MJ Lytle said: “Defaults have been rising, and downgrades have accelerated sharply this year.”
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