Why have high yield bonds proven so resilient?

Nicholas Trindade, fixed income fund manager at Axa Investment Managers, said he is currently “concerned” about the investment opportunities for high-yield bonds due to unusual market conditions.

High-yield bonds should be the most economically sensitive part of the fixed-income market because the companies that borrow in that part of the market are more likely to default, and weaker economic conditions increase the likelihood that more companies will default.

Meanwhile, higher interest rates are generally considered negative for high-yield bonds because the returns offered by lower-risk fixed-income assets rise, reducing the propensity for investors to own riskier assets.

But despite these apparent negatives, the asset class has proven resilient over the past three years, outperforming the traditionally lower risk class of UK government bonds, as table one below shows.

Jordan Lopez, head of the high yield strategy group at Payden and Rygel, said high yield bonds are a “short-duration” asset class, and thus one of the typical ways fixed income investors diversify, by owning different parts of the yield curve, is not available.

But he said there are quite a few differences in terms of the spreads between the higher and lower quality segments of the high yield market, so this is a way to achieve diversification within the asset class.

He said the difference in returns could be as much as 600 basis points.

His general view is that high yield bonds have been resilient this year because many companies held on to the lower interest rates seen before this year and were thus unaffected by the rise in base rates. low and returns resilient.

James Sullivan, head of partnerships at Tyndall, said: “Like the number 10 role in rugby, high yield bonds help bridge the gap between the forwards (investment grade bonds) and the backs (equities). However, contrary to the need for a number 10, high yield bonds are generally not an all-season sub-asset class given their economic sensitivity. They don’t correlate perfectly with stocks, of course, but they do have a degree of sensitivity that undermines the benefit of bond-like diversification. Therefore, when we have invested in high yield bonds, perhaps except within the highest risk mandates, we allocate 50 percent from our equity budget and 50 percent from our bond budget.”

Darius McDermott, investment advisor at the VT Chelsea Range of multi-manager funds said: “High yield bonds are bonds issued by lower rated companies. Therefore, they have to pay a higher yield to attract investors. They are a high-yielding asset in most market conditions. Unlike government or corporate bonds, they are less sensitive to interest rates, but more to economic conditions. They are very useful in income portfolios, but can also provide some capital growth over the cycle.

A great fund option in this area is the Aegon High Yield Bond fund. This is a high conviction approach from 2 experienced managers. Both managers only do High Yield, unlike many others in the sector, and they have delivered very strong performances since taking over the fund and have a current yield of 7.4 percent.”

[email protected]