The Aviva Investors Multi-Sector Private Debt LTAF will invest across the private debt spectrum, including real estate debt, infrastructure debt, structured finance and private corporate debt.

The strategy has received £750m of initial investment from Aviva’s My Future Focus default pensions solution, which invests in a broad range of asset classes on behalf of the firm’s range of auto-enrolment Defined Contribution default strategies.

See also: Analysis: Is the end of the magnificent seven nigh?

It adds to Aviva’s existing Real Estate Active LTAF, which launched in May 2023, and the conversion of its Climate Transition Real Asset fund to sit under the new regime in March.

Daniel McHugh, CIO at Aviva Investors, said: “We are pleased to add a dedicated private debt solution to our suite of Long Term Asset Funds, further positioning Aviva Investors as the largest provider of LTAFs for the UK DC and Wealth market.

“Private debt is a key growth area for us, and we believe our multi-sector approach will best-capture relative value through the market cycle.

“This should give it potential to deliver strong risk-adjusted returns and diversification to pension schemes, whilst also meeting their liquidity needs.”

See also: Knacke’s money maps: Shine on?

Japanese fertility rates first dropped below the 2.1% threshold – the level required to maintain a stable population (in the absence of immigration) – in the 1960s. In Europe, it fell below this level by the 1980s, and the US reached this point in 2008. Globally, with the exception of Africa, every major region now experiences fertility rates below this replacement level. The result is inevitable – a shrinking labour force, as more people retire or leave the workforce than enter it. This demographic imbalance threatens future demand and economic growth and increases the risk of deflation, as well as exacerbating cyclical dynamics.

Working age population, as % of total, OECD countries

To support demand, governments have been printing money and increasing spending to unsustainable levels. A recent UN report highlights that 3.3 billion people live in countries where interest payments on debt surpass what is spent on essential services such as healthcare and education. This situation is far from inflationary – instead, it reflects unsustainable government spending and the rise of the welfare state.

See also: Knacke’s money maps: Health is wealth

The reality is that the path forward for inflation appears volatile. We can expect secular deflation, as debt levels and economic strain begin to weigh heavily on demand, with temporary bursts of inflation triggered by excessive money printing and debt creation in what we call the ‘fiscal age’. We’ve seen this before in the late 19th and early 20th centuries. This era was defined by extreme inflation volatility, underpinned by demographic shifts, supernormal debt creation, extreme wealth inequality and the rise of a new superpower.

I expect AI and new disruptive technologies that support productivity will continue to do well against this backdrop, as should real assets and stores of value that will withstand fiat devaluation.

But one thing is certain, without meaningful reform it is difficult to imagine reversing the current trends of rising inequality and declining living standards.

This article originally appeared in the October issue of Portfolio Adviser magazine

The new regulation will reduce public sector net financial liabilities, or net financial debt, as a percentage of GDP.

“Net financial debt recognizes that government investment delivers returns for taxpayers by counting not just the liabilities on a government’s balance sheet, but the financial assets too,” Reeves said.

Under the current system, public investment rates were projected to drop from 2.5% of current GDP to 1.7% in five years time. The new system will use the stability rule, with the government only borrowing for investment, and the investment rule, which reduces net financial debt as a proportion to GDP.

This is the last year that the fiscal rules will target the fifth and final year of the forecast,” the budget stated.

“The rules must be met by 2029-30 at this Budget, and until 2029-30 becomes the third year of the forecast, at which point both rules will target the third year of the rolling forecast period.”

Capital spending will include four key ‘guardrails’, including a rate of return that is at least as large of that on gilts, strengthening institutions to improve infrastructure delivery, set capital budgets at every five years, and ensuring greater transparency through annual reports.

“These fiscal rules will ensure that our public finances are on a firm footing while enabling us to invest prudently alongside business,” Reeves said.

Reeves ensured that the funds freed up by this policy change would explicitly go towards investment projects, rather than public sector pay or routine government expenses. By the end of September, public sector net debt amounted to 98.5% of the nation’s GDP, and outpaced the Office for Budget Responsibility’s monthly borrowing estimate by £1.5bn.

“The only way to drive economic growth is to invest, invest, invest,” Reeves said in her speech.

Adrian Gosden, UK equities fund manager at Jupiter Asset Management, added: “UK Chancellor Rachel Reeves has delivered a tough but fair budget, much of which was already expected as it had been leaked to the market. Sterling is just a little weaker and the cost of government debt fell during her speech. The UK is open for business.”

Lindsay James, investment strategist at Quilter Investors, noted that impacts on corporate profitability could mean that businesses are less willing to participate in the investment.

“What now needs to be delivered is economic growth if the recovery in both the public finances and the wider economy is to take place. Whilst re-defining fiscal rules to take account of investment returns is not unreasonable, the timing of it is a direct result of the clear fiscal pressure facing this government,” James said.

“Guard rails appear sensible and subject to independent oversight. However with businesses historically providing around 80% of investment, the big question is whether corporate profitability will be weakened that they no longer wish to hold up their end of the bargain to such an extent.”

In a research note published at the end of last month, following the US Federal Reserve’s decision to cut interest rates by 50 basis points, the team said this provides “a pivotal moment for markets as a whole”.

When it comes to fixed income in particular, it said the cut could “finally be a turning point” for bond investors who have dealt with “challenging, volatile market conditions for a number of years”.

There is no denying that the last two years have been tough for fixed income investors.

See also: Amundi introduces Article 8 global fixed income strategy

“The inflation experienced in 2022, coupled with the aggressive monetary policy that followed from central banks [including the Fed] created an incredibly difficult backdrop,” the team wrote. “Furthermore, volatility has continued to characterise the markets too, and has been exacerbated by investors expecting a rate cut far sooner than September 2024.

“In fact, interest rates remaining elevated, following the Fed’s aggressive rate-hiking cycle, has been one of the biggest issues for investors. Arguably, though, rates had to remain higher as inflation proved to be stubborn and resisted tightening measures made by the Fed.”

Therefore, the Square Mile’s research team said the Fed remained hawkish, leading to higher yields and higher coupons on bonds, while bond prices remained suppressed.

“Now, the pendulum seems to have swung for policymakers,” it said. “The risk for the Fed is no longer inflation, but a slowing economy. The rate cut could, therefore, be the key to unlocking returns many bondholders have been waiting for as when interest rates fall, bond yields typically decline as well, pushing bond prices higher.

“For those holding existing bonds, this is particularly beneficial as the value of their bonds rise in response to lower yields in the broader market.”

What’s more, the fact the US central bank is moving in line with broader market expectations gives “a clearer insight into the future”, the team said. While monetary policy decisions can be surprising and against consensus, Square Mile believe investors can now count on further interest rate cuts, which will continue to support bond prices.

Which bond funds are attractive?

Square Mile said there are “several” types of bonds funds that now look attractive. For instance, the team currently favours investment grade credit over government bonds, due to a favourable economic backdrop for company earnings.

Overall though, it prefers strategic bond funds, which are able to invest across a range of fixed income assets and rebalance portfolios depending on the top-down and bottom-up opportunity set.

See also: M&G selects Joe Sullivan-Bissett as fixed income investment director

“For many, the news of a rate cut should be promising especially for bondholders, given the rollercoaster ride of the last two years for fixed-income investors,” Square Mile concluded. “Bonds won’t just be used to mitigate risk in equities; they could also generate returns in themselves. 

“That being said… we still believe it’s vital to stay vigilant to risks too. After all, the Fed has cut its rate by more than many assumed, in response to weak economic data. Being flexible and taking a diversified approach will be essential to navigating any further tricky periods, as well as adjusting interest rate risk as required by market conditions.”

With this new capital, Chrysalis intends to return £100m to shareholders, likely in the form of buybacks. The additional money will bring the trust’s liquidity position from £47.2m to £117.2m.

The £504m trust is down 68.1% over the past three years and its shares are trading at a sizable 47.6% discount to its net asset value, but a potential share buyback programme could rectify that.

Managers Nick Williamson and Richard Watts said the newly added debt “will allow the Company to accelerate returns to shareholders as realisations occur within the portfolio”.

Williamson and Watts left Jupiter Asset Management in March this year to set up their own firm that would allow them to manage Chrysalis independently.

Debt peaked past $313trn at the start of the year after borrowers added around $100trn of new debt to their books since 2015, according to the Institute of International Finance (IIF). It noted that $89.9trn of that was made up of government debt.

These lofty debt levels made Pidcock cautious and led him to make gold mining company Newmont the sixth largest holding in the portfolio, representing 4.8% of the £1.9bn fund.

“Fiscal policy globally is very loose, and that is a concern,” he said. “Budget deficits – even when economies have supposedly been strong – have been way too high. And that’s why we invested in gold mines.

“We thought the gold price is probably going to go up because these paper currencies are just going to get more and more diluted as governments have to print more money to pay the interest on the debt they’ve accumulated.”

Global debt (in USD) since 2015

Pidcock’s exposure to the precious metal may not seem high, but he said “everyone should have some exposure to gold, whether it’s as an insurance policy or just sensible diversification”.

And an allocation to gold may be all the more important now that its purpose within portfolios is rivalling the role traditionally held by bonds.

“If there was a new geopolitical shock, I think gold would be seen as a place to hide,” Pidcock said. “Government bonds are traditionally seen as that, but if that political shock required a lot more government expenditure, then government bonds might not be the safety net that they have been in the past.

“We saw in Covid that government expenditure ballooned and created a lot more inflation, which wasn’t great for bonds, and that’s probably where we are again now. The first reaction of governments in a crisis is to spend even more money, so I would say everyone should have a little bit of gold.”

See also: Crisis point: Concerns grow over mounting government debt levels

This was echoed by Sotirios Nakos, multi-asset fund manager at Aviva Investors, who agreed the precious metal was encroaching upon the downturn protection function historically reserved for fixed income.

“Gold is challenging the traditional role of bonds in portfolios,” he said. “While gold is generally negatively correlated with real interest rates — meaning higher real rates increase the opportunity cost of holding gold —this relationship is not stable and varies over time.

“Particularly during periods of high inflation, the real rate effect on gold becomes smaller, making it a valuable asset in a diversified portfolio, potentially rivalling bonds. For cautious portfolios, however, the volatility associated with gold can limit its overall allocation.”

While gold does have its appeals as a safe haven in a high debt world, Rathbones multi-asset manager Will McIntosh-Whyte questioned whether its rallying price can be maintained.

An ounce of the precious metal will set investors back £1,951 today, which is 25.5% more expensive than it was a year ago. But McIntosh-Whyte said its price may have been artificially accelerated by central bank buying.

See also: Gold hits record high: Fund picks to play precious metals

The World Gold Council estimates that central banks bought 2119 tonnes of gold in 2022 and 2023, which was three times higher than they had in the prior two years combined. And they pushed their buying even higher in 2024, purchasing an additional 484 tonnes in the first half of this year.

A slowdown in the central bank buying that has fuelled a powerful rally could see gold’s soaring price come to a standstill, according to McIntosh-Whyte. Fixed income could therefore keep its seat as the best protector in the case of a downturn.

“My issue with gold is that it has obviously had a very strong run,” McIntosh-Whyte added. “It’s always tricky to rationalised movement, especially when there’s been a decent amount of buy from places like China. With a weak property market, I think a lot of Chinese households are turning to gold, and the same is happening in Japan in light of the country policy that we’ve seen there.

“There has just been a significant amount of central bank buying over the past year or so – it’s my view that US treasuries are a more reliable instrument to help protect portfolios in the majority of scenarios.”

See also: Interest rates: Tough decisions ahead for central banks

Yet the US government’s towering debt levels have not gone amiss on McIntosh-Whyte. The nation’s $35.3trn of debt accounts for around a third of all global government debt, making McIntosh-Whyte slightly more sceptical of his US treasury holdings.

“Earlier this year, we started slightly diversifying our exposure away from the US and into a number of European nations where we see the fiscal situation being a bit stronger, and where we’re more relaxed about the inflationary environment,” he said.

“But that’s coming from a position where we’ve actually held a lot. So I’m not rushing to sell my US treasuries to put it into gold – I’d rather just keep a little bit of dry powder.”

The French elections shone a spotlight on its government debt crisis. The country’s political sclerosis has troubled financial markets, because it makes tackling the vast and burgeoning debt even more difficult. Greece, Italy, France, Spain, Belgium and Portugal all have debt levels of over 100% of GDP.

A recent survey of central bankers by UBS found that the level of global government debt was their fastest-growing concern. Some 37% of central bank managers said global sovereign debt levels were among their main worries for the global economy in the year ahead. This was an increase from just 14% who were troubled about the same issue last year.

See also: What will the French election result mean for financial markets?

The Institute of International Finance says that global government debt is now over $90trn though more than a third of this ($34trn) is attributable to the US. In aggregate, global debt as a percentage of GDP is likely to tip back over 100% this year. Governments have struggled to normalise spending after the pandemic.

Central bankers are not the first to raise the alarm. In June, the IMF urged the US to address its mounting government deficit, criticising both presidential candidates’ fiscal plans and warning that the country faced higher financing costs.   

It said: “The fiscal deficit is too large, creating a sustained upward trajectory for the public debt-GDP ratio. The ongoing expansion of trade restrictions and insufficient progress in addressing the vulnerabilities highlighted by the 2023 bank failures both pose important downside risks.

“Under current policies, the general government debt is expected to rise steadily and exceed 140% of GDP by 2032. Similarly, the general government deficit is expected to remain around 2½% of GDP above the levels forecast at the time of the 2019 Article IV consultation. Such high deficits and debt create a growing risk to the US and global economy, potentially feeding into higher fiscal financing costs and a growing risk to the smooth rollover of maturing obligations.”

Manageable?

That said, there are those who believe deficits are, for the most part, still manageable. It is also worth noting that government debt is not central bankers’ greatest concern: they are more worried about geopolitical conflicts, persistent inflation and an uncontrolled rise in long-term yields.

Oxford Economics says: “Key risks to fiscal sustainability include rising debt servicing costs, aging populations with related social spending, geopolitical risks and associated defence spending, and climate-related greening investment. All of these risks are currently manageable.

“Higher debt servicing costs are not critically threatening even if higher inflation leads to higher-for-longer policy rates as it would also mean higher fiscal revenues. Although defence spending is likely to rise from here, it is still a relatively low budget item (around 1% of GDP in most European economies) and therefore is unlikely to cause disruptions. Climate spending too is relatively low, though it already exceeds previously established targets in most advanced economies.”

See also: Barings: Glimmers of optimism in EM debt, but risks remain

It believes European countries could reduce debt without major fiscal changes. However, it believes the US may have problems ahead. It is currently running with debt at 122% of GDP and will need significant policy adjustments to stabilise its growing debt levels. Oxford Economics believes political changes might shift the short-term debt trajectory, but will not change the overall sustainability as it stands.

There are also more encouraging signs ahead. Growth is improving across much of Europe, including previous laggards such as the UK. This may incrementally start to improve the debt problem. Falling interest rates may also improve the sustainability of debt levels.

Political instability

Even if European debt is – largely – sustainable at current levels, it makes fragile politics a greater risk. A wayward populist government could destabilise countries’ fragile fiscal balance. Oxford Economics adds: “Even in countries where current debt paths don’t call for significant cost cuts, the question remains whether current spending plans might in unfavourable scenarios jeopardise debt sustainability.”

This circles back to the problem in France. Frédérique Carrier, head of investment strategy for RBC Wealth Management in the British Isles and Asia, says: “Markets worry that the National Rally’s expansive fiscal policy at a time when the country’s fiscal deficit exceeds 5% could destabilise the region, much like Greece did in 2012. This would be problematic as France is the second-largest economy in the eurozone. Ultimately, we believe that if the RN becomes part of the government, it would likely align itself with Brussels’ fiscal policies. It would not be in the RN’s best interest to upset the apple cart ahead of the French presidential elections in 2027, in our view.”

See also: Biden vs Trump: What to expect from the next biggest election

Jim Cielinski, global head of fixed income at Janus Henderson Investors, says the US election could bring the US debt problem to the fore. “This could shine a spotlight on government debt levels and fiscal profligacy…It could also reawaken concerns around protectionism and tariffs on trade, given that easing of supply chain bottlenecks has been instrumental in helping to bring down inflation from its post-Covid highs.”

While global debt levels appear sustainable for the time being, they remain vulnerable to poor political management and – in particular – populist governments with little inclination to fiscal responsibility. The situation in France may be a trial run for an even bigger problem in the US later this year.

The decision, which is subject to shareholder approval, comes after Home Reit was unable to re-finance its £114.6m remaining debt. Home Reit’s investment manager AEW UK had announced it would instead look to pay down borrowings through the sale of properties within its portfolio.

In a stock exchange announcement this morning (16 July), the board said that the expected size of the trust following the repayment of its debt may be too small for investors when considering its future as a listed Reit.

Michael O’Donnell, non-executive chair of Home Reit, said: “It is clear that Home Reit continues to face extensive challenges, including in respect of its debt position and pursuing and defending litigation action, and responding to an FCA investigation.

“Against this backdrop and the expected reduced size of the company’s portfolio, following an extensive review the board has concluded that the best course of action for shareholders is to propose a managed wind-down strategy.

“I would like to thank shareholders for their ongoing patience and support through the stabilisation process as we strive to address, and seek redress for, the issues facing the company.”

The board added that shareholders should be aware that the trust’s ability to make distributions to shareholders will be constrained while it faces potential group litigation and an FCA investigation.

“At present, the board is unable to assess properly its ability to make distributions under the applicable legal requirements. In addition, the company expects to retain capital to meet corporate costs and allow it to pursue legal action against those it considers responsible for wrongdoing.”

Home Reit was one of the largest investment trust initial public offerings of 2020, raising £240m.

However, uncertainty over the trust’s future intensified in 2023 following a series of issues over the 18 months, including the collapse of its rent roll, delayed annual results leading to de-listing from FTSE indexes, and accusations from shareholders over a lack of adherence to its investment policy.

“There is no other way to say it, this year was horrendous,” said CEO Andrew Monk. “Our loss of £2.7m for the year was very disappointing and the working environment also became very unpleasant.

“Market conditions are the worst I have known in my 40 years working in the financial industry and, sadly, when times are tough some people show less honesty and integrity, which simply makes it harder for everyone, as it creates a lasting negativity even though they do not appreciate it at the time.”

Cash also fell 82% over the period, dropping from £1.27m to £229,000 as the company’s debts increased to £589,157.

Monk said: “Debtors have become an issue across the City, as many small companies struggle for cash as they cannot raise new equity; but in general payment is nearly always eventually recovered.”

He accredits much of the firm’s poor performance to the “terminal decline” of the UK equity market, which continues to suffer a high volume of outflows.

“It is incredible how London has been allowed to lose its international status as a premier stockmarket,” Monk added. “The UK Government has shown absolutely no understanding of its importance, and the relationship between strong stock markets and strong economies, which generate more tax receipts.”

Moving forward, VSA Capital Group will focus on assets within the mining sector, which Monk forecasts to have strong tailwinds over the coming years.

“These results are extremely disappointing, but they are also now in the past and we are on a much stronger footing,” he said.

“We believe that we are at the start of a huge bull market in commodities for the next 3-5 years and this will give us a fantastic macro environment for us to deliver significantly better results in 2024, although the world is still a very uncertain place with changing politics globally, wars that never seem to end and a brewing East/West cold war.”

They have steadily been removing money from gold ETFs since 2020, when the total amount held in them peaked at around $110m. That has since dropped about 25% to $82.2m today.

But over the same period, the price of gold has more than doubled (up 56.6%) from $1,921 per ounce at the start of 2020 to its current price of $2,373.

This bucks the trend investors typically follow with a growing asset class – they usually try to capture upside growth rather than pivot away from it.

Less than 10% of advisers are considering increasing their gold exposure, according to a recent Bank of America survey, with 75% holding less than 1% of their portfolios in the precious metal.

There are now concerns that this declining demand could bring the gold rush to a halt, but Shard Capital’s head of research, Ernst Knacke, said it has only just begun.

Uplift from liabilities

Investors who anticipate the gold rally to slowing have failed to consider the strong tailwinds from government liabilities – a driver that could keep boosting the gold price for some time to come, according to Knacke.

Government deficits are at an all-time high and central banks will likely need to print more money in order to fund these liabilities. Fiat currencies should suffer as a consequence, which will support the price of gold in turn.

Knacke pointed out that gold prices have risen far less than most central banks’ soaring liabilities over the past 20 years, leaving the precious metal relatively undervalued by comparison.

“The increase in the price of gold has not held up with the enormous amount of money printed by central banks,” he explained. “Considering more government debt is likely to end up on the balance sheets of central banks, the upper bound for gold is still a long way off.”

See also: Is it too late to take a renewed interest in gold?

Federal debt in the US stands at $34.6trn as of last year, which is a sizable 123% to the nation’s gross domestic product (GDP). That debt-to-GDP ratio is 23 percentage points higher than it was a decade before, and an even steeper 63 percentage point increase over the past 20 years.

In fact, US debt has generally been on the rise since 1981, increasing or remaining the same for 35 of the past 42 years.

But gold’s attractiveness in relation to government liabilities is only one reason to expect an ongoing rally, according to Knacke. Gold is renowned for protecting against uncertainty, which is abundant amid this year’s many elections and geopolitical tensions.

Strengthening demand from Asia

Concerned investors in China and Japan have already began buying gold en masse as a means of shielding their savings from uncertainty.

Those in the west who question the gold rush’s longevity may therefore need to take a broader look at the market, according to George Cheveley, manager of the natural resources strategies at Ninety One.

Investors in China and Japan have been buying gold, but not through ETFs, which is a vehicle mostly used by western institutions and individuals. This could explain why the price of gold continues to rise despite falling demand for ETFs specialising in the precious metal.

See also: Will economic green shoots entice investors back to the UK market?

Cheveley said: “[Chinese and Japanese investors] are attracted to gold as a hedge against weakening currencies, geopolitical risk and diversification from equities, fixed income and real estate asset classes.

“Following the sanctioning of the US dollar in Russia, other countries have been diversifying away from US treasuries in favour of assets such as gold which are liquid and can be held domestically.”

A shiny outlook for gold

Investors in the west may have had little appetite for gold, but they can be forgiven for ignoring the asset class given the opportunities available to them elsewhere, according to Chris Beauchamp, chief market analyst at IG Group.

Strong gains from US stocks last year presented an attractive investment opportunity for those wanting to grow their savings, while decade-high yields in the fixed income space enticed income-seeking investors.

Despite competition from other asset classes, Beauchamp said there is “still plenty of room for gold to move higher” over the long term. Conflict in the Middle East is providing a “solid underpinning” for the precious metal as a hedge against uncertainty, which could be exacerbated by any number of the other tensions in markets this year.

“Gold’s apparent unpopularity has been driven by the better returns on offer in stocks (for capital) and bonds (for income), but the rising price is bound to attract more inflows, in turn driving the price higher,” Beauchamp said.

Given the strong drivers from government liabilities, protection from uncertainty, and demand from Asia, Knacke said that investors should not be so quick to call an end to the rallying gold price.

“The inevitability of financial repression is misunderstood, macroeconomic and geopolitical event risks are under-appreciated, and gold is generally under-owned by institutional and retail investors in the west, whilst the underlying trend remains very strong and robust,” he added.

“All in all, the outlook for gold is as shiny as the metal itself, and we retain significant conviction and exposure.”

See also: AJ Bell: Six companies that could IPO in London this year

Ralph and Roberts announced they had joined the firm last year and will run the fund under their own boutique – Palomar Fixed Income.

The fund will focus on interest rate and credit risk, within an unlevered core global bond portfolio that emphasises liquidity. The managers will avoid lower-quality bonds which are illiquid.

See also: Fidelity splits CIO role and appoints equities head

Ralph spent over 15 years at Artemis, where she set up and managed the £1.8bn Artemis Strategic Bond fund, while Roberts spent 14 years at Aegon Asset Management as head of fixed income and retired in 2022 as head of global bonds at Liontrust.

Ralph said: “We believe the current market offers the perfect opportunity for bond investors to go back to the core, whereby bonds now constitute the value part of a portfolio.

“Many leading bond funds have chased growth, but we will restrict equity-like assets such as high yield, EM and subordinated debt as investors will need to broaden their risk approach in this new regime.”

Roberts added: “Bond markets can be inefficient and often deviate away from their fair value. Our value-driven philosophy and nimble portfolio management means that investors will benefit from a combination of long-term capital growth and income.”

Funds in the IA Global High Yield sector enjoyed an average return of 14.3% in dollar terms last year, but investors raised concerns in the second half of 2023 over a potential maturity wall building in the sector, particularly in the European and US high yield markets.

Speculative-grade debt is forecast to make up 12% of the $2trn in debt maturities this year, but should account for a fifth (20%) of the £7.3trn maturing in 2026. Now that we are one month in to the new year, do investor’s worries around this approaching maturity wall persist?

Sarah Harrison, global high yield manager at Allspring Global Investments, said the risks associated with a possible maturity wall are “over-egged”. She believes the build-up is associated with central bank interest rate rises, which have led to issuers holding on to lower coupon debt for longer, whereas previously they would have used their ‘call option’.

“40% of European high yield and 25% of US high yield comes due over the next three years, which is significantly higher than usual,” she said. “Taking a step back, high yield bonds have a nifty feature called call ability, meaning issuers can redeem their bonds prior to maturity if it makes financial sense for them to do so.

“In an environment where rates have been trending down, it made sense in most cases for issuers to call and refinance at the earliest opportunity because they were getting lower interest rates. Now that we’re in an environment where rates have gone higher, our view is that issuers are being savvy around hanging on to low coupon debt for as long as possible.

“The proportion of distressed debt in the high yield market is quite low, and only slightly higher than market-wide distress. Our view is that this isn’t the sign of impending doom for the high yield market that some might think it is.”

According to Ee-Yung Yip, senior portfolio manager of global credit at Nikko Asset Management, investors were more concerned about the maturity wall in mid to late 2023, but those worries have eased since the turn of the year.

“The potential implications included risks of a liquidity crunch for a number of issuers who might be unable to refinance their high yield debt, a significant deterioration in credit metrics as a result of high cost of funding, spread volatility spiking, and credit spread widening to levels well above the long-term average. I would say that these concerns have faded somewhat since the start of the year,” he said.

“The cost of fixed-rate debt including for high yield bonds has fallen meaningfully over the past 3 months. For example, the USD BB credit curve has come in 70bps to 75bps and the equivalent EUR curve has come in around 80bps, making it a lot cheaper now for HY issuers to refinance their near-term debt.

“This is even before the key central banks embark on their well anticipated rate cuts in 2024. There is an expectation that volumes in HY primary markets will rise in 2024 (vs 2023), as borrowing costs continue to decline and refinancing conditions become increasingly more favourable.”

Guillaume Paillat, multi-asset portfolio manager at Aviva Investors, said the maturity wall is more of an issue for 2025 and beyond, although it will certainly require actions this year.

“The improving trend in corporate leverage should provide some support, although interest coverage will continue to deteriorate as the impact of past rate hikes start to take effect.

“Having said that, the rally in rates and the sharp spread compression experienced in Q4 mitigates that refinancing burden somewhat. This maturity wall is more pronounced in the European High Yield space but also focused on better quality BB credits, and hence it should be manageable.”

The outlook for the asset class is positive over the year ahead due to a higher-quality ratings mix, with 56% of issuers boasting a ‘BB’ credit ratings. Less aggressive new issuance, fewer near-term maturities, and an energy sector that is far healthier than previous cycles also paint a rosier outlook, according to Neuberger Berman senior portfolio manager for non-investment grade credit Simon Matthews.

“With attractive yields, generally stable fundamentals and default rates in the US, Europe, other developed markets and EM expected to remain around average in 2024, the outlook is favourable for global high yield. While Emerging Markets corporate high yield defaults have risen from the lows, investors would be better served to focus on select opportunities away from the higher risk regions and sectors such as Eastern Europe and China Property.

“In EM high yield corporates, we see receding default risks, with default rates expected to decline to 4.8% in 2024 from 7.8% last year. Excluding the China property sector, which is likely to remain the main driver of corporate defaults this year, the expected default rate drops to 3.3%, which is lower than the historical average. Risks from a further slowdown in earnings are mitigated by strong corporate balance sheets on average, with liquidity buffers near decade highs following years of corporate deleveraging.”