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Invest in high yield, says Barings/Schroders

Wheat field1Fund management houses Baring Asset Management and Schroders are advocating investment in high-yield bonds.

Both issued separate press notices today, with Barings saying valuations remain attractive and fundamentals are still solid for the high yield corporate bond market. The firm also said fears of an approaching high yield bubble are unfounded.

Ece Ugurtas, manager of the US$605m Baring High Yield Fund, said spreads remain attractive and high yield investors are being well rewarded from a risk-return perspective.

“Over 80% of companies in high yield are still in the deleveraging mode. The amount of debt in the asset class is at an all-time low in terms of leverage and the pace of decline in default rates has been very supportive of high yield,” he added.

Additionally, said Ugurtas, “as central banks begin to move towards monetary policy normalisation, we expect the high yield bond market to continue to outperform”. High yield bonds have a lower correlation with interest rate movements and a higher correlation with the improvement in macroeconomic conditions and the credit quality of bank issues.

Wes Sparks, head of US fixed income at Schroders, believes a good buying opportunity in high yield credit is about to emerge.

In recent months Sparks says he has commented that a meaningful correction in high yield would unfold this summer and could drive yields as much as 100 bps higher.

“The market is now getting there,” he says. “As of Monday June 20th, the yield on the global high yield index had risen 80 bps from its tightest point about six weeks earlier.”

Sparks said that with the yield on the global high yield index at approximately 7.6% and the option-adjusted spread versus Treasuries at more than +560 bps, the market is getting closer to a point where valuations will become very compelling.

He says some outflows from mutual funds in the sector could offer buying opportunities for pension funds.

©2011 funds europe