“I am a little bit negative on US high yield because of its high weighting to energy,” said Bryn Jones, manager of the Rathbone Strategic Bond Fund.
“Also, you generally find that high yield outperforms in the early part of a rate-rising cycle, but underperforms at the back end – typically because rates have gone up too much and are squeezing companies’ earnings.”
Jones believes that there is triple threat to the high yield space, with various elements combining to scupper any potential performance.
“My concern about this cycle is that, if and when rates go up, the next peak will be much lower than previous cycles,” he expanded. “We could get to the back end of rate rises where high yield starts to struggle quite quickly, and on top of that we have the liquidity overlay.
“It is a three-pronged situation; one, high-yield companies starting to struggle as their earnings go down and costs go up; two, a lack of liquidity, which is obviously a major concern; and three, there are too many investors in the space, and when things start to get tough they will exit quite quickly.”
Money or nothing
Conversely, while market illiquidity has become something of a fixed income elephant in the room, particularly for high yield, in Hayes’ opinion investor anxiety could inadvertently avert any market shock.
“Fixed income has had huge inflows and there are lots of investors in the market that may not have been there 10 years ago,” he said. “They are now being crowded down the yield curve, but illiquidity might not actually become a problem.
