The recent broad-based market sell-off following U.S. President Donald Trump’s “Liberation Day” has reverberated across asset classes, including U.S. and European high-yield markets, where spreads have widened notably. Heightened uncertainty and volatility have made for particularly busy days for asset managers, among them the Stockholm-based team at high-yield bond specialist Ridge Capital. In response, the team running Ridge Capital Northern Yield has been actively reducing leverage, building cash reserves to take advantage of more attractive opportunities, and implementing hedges to manage downside risk.
“As many experts have already commented, tariffs and trade wars rarely produce winners, with the biggest loser likely being the US itself,” writes Christoffer Malmström, Lead Portfolio Manager at Ridge Capital, in a note to investors sent on Monday, April 7th. Many market participants had hoped for more calming comments from the U.S. President over the weekend, but instead, both he and Treasury Secretary Scott Bessent signaled a protracted negotiation period, triggering a global market sell-off on Monday.
Spread Widening in U.S. and European High-Yield Markets
“Significant moves have been observed in the U.S. and European high-yield markets, with the Bloomberg European High Yield Index widening to 420 basis points, up from 300 basis points a month ago,” observes Malmström. In the U.S. high-yield space, spreads have similarly jumped to 450 basis points, up from around 300 basis points at the start of March. The Nordic high-yield market has proven more resilient, with spreads widening by 60 basis points over the past week to 475 basis points. “This spread widening has been largely driven by Norway, where the oil and shipping sectors have come under pressure,” Malmström explains. In contrast, spreads in Sweden, for example, have remained stable. “As we’ve seen before, the broader high-yield indices tend to react more quickly than the imperfect, lagging, lower-correlated Nordic high-yield market,” adds Måns Levin, CEO of Ridge Capital.
“As we’ve seen before, the broader high-yield indices tend to react more quickly than the imperfect, lagging, lower-correlated Nordic high-yield market.”
Måns Levin, CEO of Ridge Capital.
In the Nordic high-yield bond market, the biggest single risk remains potential outflows from daily traded UCITS funds, according to the Ridge Capital team. “To date, there doesn’t appear to have been significant outflows, but many funds have positioned themselves for this possibility by increasing their cash positions,” observes Malmström. “Last week, there were increased levels of offers in shorter-dated investment-grade credit, indicating that funds are seeking to increase their liquidity buffers,” he adds. As is often the case, higher-quality and more liquid bonds tend to be sold first, implying that any spillover into the high-yield segment may be delayed. “In the best-case scenario, positive news on trade negotiations could emerge before this happens, but given recent statements from the US administration, we are less optimistic.”
“To date, there doesn’t appear to have been significant outflows, but many funds have positioned themselves for this possibility by increasing their cash positions.”
Christoffer Malmström, Lead Portfolio Manager at Ridge Capital.
Hedging and Dry Powder at the Ready
Having anticipated heightened market volatility for some time, the investment team at Ridge Capital has been net sellers in recent weeks, reducing leverage, building a liquidity buffer, and preparing dry powder for future bargain opportunities. “We’ve also increased our market short positions, which act as hedges or portfolio ‘insurance’ in the event of further spread widening,” adds Malmström. The fund’s cash yield provides an additional cushion, currently standing at 13 percent. “This means that for every 1 percent drawdown, it would take less than a month to recover without our hedges,” Malmström explains.
“The return of 25 percent in 2024 would not have been possible without the sell-off in 2022-2023. We thrive in such markets.”
Christoffer Malmström, Lead Portfolio Manager at Ridge Capital.
The founding duo behind Ridge Capital opted for a Luxembourg-domiciled Reserved Alternative Investment Fund (RAIF) structure for their high-yield bond strategy, believing it to be better suited for navigating an “inefficient and imperfect market.” With monthly liquidity, the alternative investment fund structure allows Ridge Capital Northern Yield to remain opportunistic, particularly in a period of a significant market dislocation. “The return of 25 percent in 2024 would not have been possible without the sell-off in 2022-2023,” according to Malmström. It’s during periods of investor overreaction and broad-based selling that true opportunities emerge. “We thrive in such markets.”
