High Yield: Make the repricing great again ?

         After a robust start of the year, the HY market is finally seeing cracks multiplying. How bad could it go ?         No doubt that all started with a trade war that seems more likely to continue and escalade than to end up quickly.         Valuations do not help: $HY spreads are already pricing in a significant decline in HY default rate (towards 3%), an assumption that becomes more uncertain against the backdrop of the trade war         Moreover, HY tight valuations have been justified by substantial inflows (more than $20bn YtD in HY bonds and leveraged loan funds, cumulated), which have persisted over the last few weeks… but we doubt those inflows will stay immune from an uncertain geopolitical outlook and escalating tariffs.Against this backdrop:         $HY spreads still appear significantly tighter than their fair-value (30bp at least), not withstanding the risk of the market over-reacting  by pricing a non-negligible probability of a recession         €HY spreads actually display a higher risk of correction, given their recent resilience vs their $ counterparts (50bp widening risk according to our fair-value model). €BBs are most at risk of repricing on the back of tight valuation vs $BBs.         We therefore prefer $BBs and €Bs in that environment, although we adopt a more cautious stance overall on HY based on a significant risk of spread widening.         The only reassuring and mitigating factor is the low level of refinancing needs and a conservative maturity profile. The US$ HY bond market has only 7% of redemptions occuring before end-2026.