The average remaining maturity of the European high-yield market has declined significantly over the past two decades. The following article explains why this has happened and what advantages and disadvantages it presents for investors!
Bonds Are Becoming Shorter-Term
In its early years, the European high-yield market was still dominated by companies from defensive, non-cyclical sectors. In 2000, for example, bonds issued by telecommunications companies dominated the market. Due to the high visibility and predictability of their business models, these companies were able to place long-term bonds on the market, and the average remaining maturity of the bonds at that time was nearly 7.5 years.
Since then, there has been a structural decline in the average remaining maturity in the European high-yield market: As the European high-yield bond market became more established, companies from more cyclical sectors—with less predictable earnings and debt sustainability—were also able to issue bonds, though only with shorter remaining maturities.
Remaining Maturity of the European High-Yield Market
Cyclicality of Issuance Patterns
In addition to the structural shortening of remaining maturity, it can be observed that during times of crisis, issuers are able to place either no bonds at all or only those with very short maturities. This was the case, for example, following the bursting of the dot-com bubble from 2000 to 2003, the global financial crisis from 2008 to 2009, the euro crisis from 2011 to 2013, during the COVID-19 pandemic in 2020, and the rise in interest rates in 2022.
Normally, a certain degree of reversal occurs during the subsequent recovery phases, as the market is open to new issuances and issuers can address their pent-up refinancing needs. Furthermore, as risk premiums decline, it becomes more attractive again to pursue long-term financing.
After the Rise in Interest Rates
However, even after the COVID-19 pandemic, there was no significant extension of maturities due to ongoing economic uncertainty.
On the contrary: During the subsequent phase of inflation and rising interest rates beginning in 2022, we witnessed a remarkable slump in new issuance activity. On the one hand, investors were extremely risk-averse during this period and were reluctant to subscribe to bonds at all, let alone long-term ones. On the other hand, companies were also reluctant to accept the higher interest rates and yield levels. Instead, they hoped to buy time by delaying refinancing and wait for lower interest rates. When bonds were issued, issuers tended to prefer shorter maturities with the option of more favorable refinancing opportunities in the coming years.
Another reason for the shortening of maturities in recent years was the upgrade of several large issuers of long-term bonds to investment grade, including Autostrade, Cellnex, Ford, Lufthansa, and Netflix.
Conclusion: Be Cautious When Buying High-Yield Bonds!
The short remaining maturity leads to a low duration for the market. As a result, the overall market reacts less strongly to movements in interest rates or risk premiums. This is clearly evident in how quickly the high-yield market has recovered from the rise in interest rates in recent years.
However, refinancing stress increases more rapidly with shorter remaining maturities: If bond markets are closed during the next crisis and no other sources of refinancing are available, many issuers will come under pressure.
This makes it all the more important, when investing in high-yield bonds, to pay close attention to the profitability, liquidity, and access to alternative refinancing sources of individual issuers. For this reason, it is advisable to entrust this to a proven fixed-income credit specialist. At HAGIM, we consider ourselves well-equipped to handle such challenges thanks to our investment philosophy, which is based on in-depth fundamental credit analysis.
Risks
Price losses due to rising yields and/or increased risk premiums are possible. Even a total loss cannot be ruled out. Past performance is not indicative of future results, nor can future performance be guaranteed.
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