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High yield markets rarely trade on fundamentals alone

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The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Eaton Vance disclaims any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Eaton Vance are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Eaton Vance fund. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. Past performance is no guarantee of future results.

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      By Stephen C. Concannon, CFACo-Director of High Yield Bonds, Portfolio Manager, Eaton Vance Management and Jeffrey D. MuellerCo-Director of High Yield Bonds, Portfolio Manager, Eaton Vance Advisers International Ltd.

      Boston - Eaton Vance and its affiliates seek to actively capitalize on opportunities presented by volatile investor sentiment, while ensuring that the portfolio risk profile remains appropriate for the specific strategy. The following are excerpts from a recent conversation with Steve Concannon, CFA, Co-Director of High Yield Bonds and Portfolio Manager at Eaton Vance Management and Jeff Mueller, Co-Director of High Yield Bonds and Portfolio Manager at Eaton Vance Advisers International Ltd.

      What we are seeing: This continues to be a violent ride. During the financial crisis, it took 11 months for the spread to travel from 500 to 1000 basis points (bps). This time, it took just 21 days — and the velocity of absolute spread movement hasn't slowed much since. But thankfully, it's not all in one direction. Over the last three weeks of March, the spread on our benchmark index, the ICE BofA US High Yield Index, experienced more absolute movement than in any three-week period during the financial crisis. In the last full week of March, high yield shifted from a market of mostly sellers to one of only buyers, and inflows have returned to the asset class at record levels. After a sell-off on March 23, the market shot straight up for the rest of the quarter. Sourcing offers was very difficult. Last week started a little more balanced and then weakened in the first two days of April. The tone so far during this first full week of April is positive, but high yield has lagged equities.

      What we are doing: In March alone we spoke with more than 100 different senior management teams as we reassessed the liquidity profiles of our companies. In terms of sectors, to date we are playing it a little safer — focusing on adding risk in more defensive sectors, which we believe should perform well during further bouts of volatility. Given the opacity of the governmental support programs at present, we are less concerned about their impacts on individual issuers in the most virus-exposed sectors and more focused on assessing whether issuers in these sectors have adequate liquidity and optionality.

      What we are watching: We are watching the primary market, where there have been a number of attractive secured financings that priced at a significant concession to the issuer's existing bonds. On March 30, for example, a restaurant franchisor priced a new issuance to bolster liquidity, and the new-issue concession to the existing curve was nearly 200 bps. This was the first of a couple of similar financings recently, and we will likely see many more over coming weeks and months. This will present some opportunities to deploy capital in businesses that have short-term challenges but may fare quite well in the longer term.

      Final word: As we have often seen, markets rarely trade on fundamentals alone. We expect the uncertainty around the ongoing COVID-19 pandemic may push spreads wider. Nevertheless, we believe that current levels could present attractive entry points for investors who can take a more selective approach and allocate for a longer-term investment horizon. We will always stick to our investment process, not trying to call the bottom in prices or the wides in credit spreads, but rather taking the opportunity to buy high-yield corporate bonds that look like they're offering once-in-a-decade valuation opportunities.