As US treasuries and UK gilts languish with low yields, global high yield bonds are offering a 400% higher return.
The latest 10-year US treasury bond is returning 1.7% while global high yield bonds hit 8.1% at the end of May, according to Ece Ugurtas, head of credit investing at Barings.
He argues that yields for fixed income assets will stay subdued as economic uncertainty continues, but high yield offers attractive income-generation for investors looking for bigger profits.
“Valuations for high yield bonds are becoming increasingly attractive with the backdrop of uncertainty in Europe,” he said. “Government bonds, such as US treasuries and UK gilts, currently maintain low-yields, a result of their haven status.
“An alternative to government bonds for investors willing take a little more risk within a well-diversified investment portfolio is higher yielding fixed income assets such as high yield bonds and emerging market debt.
“We are seeing more and more investors searching for superior-yielding bonds. Looking ahead, we believe that both high yield bonds and emerging market debt will continue to produce a superior level of income relative to other parts of the fixed income universe.”
“Fundamentals in the high yield market, such as a record low default rate, remain sound. New issuance has been mainly to extend maturities and shore up liquidity. While we do not rule out short term volatility as investors switch between an optimistic and pessimistic view of the world, we expect the high yield corporate bond market to continue to offer attractive risk adjusted returns.”
Central bank announcements aimed at promoting “pro-growth” monetary policy and pledges to keep interest rates low for at least another year tend to support this view.
The Baring High Yield Bond Fund fund is sized at US$790.7 million and has performed ahead 9.4% ahead of the Bank of America Merrill Lynch Global High Yield BB-B benchmark index, which is running at 7.7% growth.
