Don’t be overexposed to Junk

By Tuesday April 4th, 2017 Investment

In the yield chasing investment environment we have seen in recent years, many an investor has migrated their asset allocation into high yield bonds otherwise known as junk bonds.

After a strong run for much of the last 12 months we worry that how are high yield bonds are at a turning point where returns could become much more erratic with the risk of serious losses.

Already there are signs of retail investors leaving the asset class following a period when the asset class was in vogue. In 2016 net inflows to high-yield funds were $8.6 billion. In 2017 year to date high yield funds have seen outflows of $7.2 billion. And the weekly retail outflows are accelerating with the second highest outflow on record of $5.86bn in the week ended March 15th, according to Lipper.

Losses are starting to mount in the asset class with the average yield to worse rising from a low of close to 5.5% in early March to 6.1% in recent trading. Rising short term losses also tend to encourage retail selling.

The recent weakness of the oil price is also of concern. The high yield bond market has a large concentration of US oil companies. Lower than expected oil prices put significant pressure on the ability of oil companies to service their debt. Analysts believe that should oil prices fall below say $40 it could precipitate a significant rise in energy sector bond defaults and hence further downward pressure on high yield bond prices.

Always remember that high yield equals junk, and junk is junk. Ensure you are not overexposed to junk.

Leave a Reply