High yield bonds off last year’s highs but remain attractive asset for investors

Sector can provide returns comparable to equities in the long-term, analysts say


Somshankar Bandyopadhyay

  • Follow us on
  • google-news
  • whatsapp
  • telegram

Top Stories

Photo for illustrative purposes only.
Photo for illustrative purposes only.

Published: Wed 14 Feb 2024, 9:00 AM

This year is expected to be another good year for high-yield bonds, analysts predict.

“There are a lot of macro tailwinds that should support all risk assets, but particularly high-yield bonds. High yield bonds benefit from growth in general, and as inflation comes down – which we believe it will – rates should rally to the benefit of high yield bonds. In some ways, it’s the best of all worlds,” Jordan Lopez, high yield portfolio manager at Payden & Rygel, said.

With all-in yields at 8%, that’s competitive with equities long-term, and historically, high yield has much better downside protection than broad equities do. “With that as a backdrop, we do expect money to keep flowing into the asset class and we expect the companies within high yield to continue to perform,” Lopez added.

In terms of the micro-economic environment, positive trends have been witnessed in terms of issuers continuing to maintain balanced balance sheets and balanced credit metrics, with overall fundamentals that suggest that they are prepared to manage through a recession. “I don’t think a recession is anybody’s base case at this point but you still have a lot of comfort with the margin of safety that you’re getting from the issuers in our universe,” Nick Burn, senior vice-president and high yield portfolio manager at Payden & Rygel, said.

Lopez believes that the biggest risk to all asset classes is a reacceleration of inflation. “We have a fair amount of confidence that we’re going to continue to trend lower in inflation, or at least hold where we’ve been for the last several months, but I think that is probably the biggest risk to markets at this point. Of course, there are always unknown risks, but I would say that’s the biggest known risk at this point,” he added.

As far as geopolitical risk goes, one of the points that often gets overlooked is geopolitical risk has impacted high yield in the past because of its impact on oil prices. “But over the last several years, as the US has become the swing producer of oil, we’re somewhat more insulated from geopolitical risk shocking oil higher and lower. That’s not to say it can’t happen, but I think that’s become a lot less of a risk just as the US has increased its production in both oil and natural gas,” Lopez said.

In terms of investment strategy, Burns sees some more attractive value in some of the auto parts manufacturers. There’s been a lot of negative sentiment in the auto sector, with inflation having impacted autos the most. “So we’re able to invest in pretty attractive names at really interesting levels. That’s showed up as a modest overweight,” he said.

Payden & Rygel is slightly underweighting the gaming sector in leisure, as well as the cruise line sector. “That’s largely a relative value call because there’s a lot of solid companies in those segments. But thematically, I wouldn’t say that we have any dramatic sector themes built into the portfolio right now,” Burns said.

More news from Business