With fixed income markets set to feel the pain of impending rate rises, concerns mounting over liquidity issues and investors fearing a potential dash for the exits, the outlook for the universe seems somewhat ominous.
So, are there any sub-sets in which investors can find opportunities, or is the lid about to come off the bond pressure cooker?
High yield has not exactly been basking in investor favour in recent times, with Richard Stammers, investment strategist at European Wealth, earlier this year likening it to running across a motorway to pick up coins.
However, market movements spell shifts in sentiment, and high yield – particularly in the US – is enjoying something of a resurgence.
Born again
While Nick Hayes, manager of the Axa WF Global Strategic Bonds Fund, has some sovereign exposure, he sees high yield – particularly in the US – as far more attractive.
“You are being paid a big yield for some element of credit risk,” he said. “For example, some of my US high yield is yielding 10%, which even compared to emerging market high yield is pretty high.”
Of Hayes’ 35% exposure to high yield, 18% is in the US.
But despite the US high yield space’s heavy exposure to energy markets and West Texas Intermediate dropping to a six-year low on 20 August at $40.80 a barrel, Hayes is unperturbed by a possible increase in defaults.
“The market has been so badly beaten up in the past nine months by the fears around the oil price, naturally it is pricing in higher default rates,” he said.
“Suddenly you are being paid a big premium for taking less credit risk than is being priced into the market. It is a pretty tough time for energy bonds, but there will not be as many defaults as people think.”
Another manager who likes high yield is Harwood Capital CIO Richard Philbin, who, in addition to holding US exposure via Aviva Investors High Yield Bond and JPM Income Opportunities, is looking to buy into the Asian high yield space.
However, not everyone is quite so enamoured.
