The Federal Reserve’s stalling over raising interest rates may be of concern to investors with holdings in high yield bonds, as any hike may spark a series of defaults among the most leveraged companies.But this is a misconception, according to fund manager Eaton Vance.
Jeff Mueller, portfolio manager and global analyst at the firm, says the biggest mistake is to think that a rising interest rate environment leads to poor performance for high yield.
He says the reverse is true and that rising rates provide a positive background for high yield, particularly if there is a gradual increase in rates as expected.
“High yield is an income-generating asset class, so higher yields would provide more attractive opportunities for reinvestment of coupons going forward, which means potentially higher returns for investors,” he says.
Despite the fact that some of this yield is coming from default risk, he believes that increasing the cost of capital will encourage corporate management to make more responsible decisions with their capital base and sharpen their focus on cash generation and deleveraging.
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