High-yield default fears overblown
Although investors are encouraged to take a more defensive posture to high-yield bonds, there is no reason to exit the asset class, according to Eaton Vance.
The firm said that high-yield default fears were overblown after high-yield bonds held up quite well in Q1 compared with other parts of the fixed-income market, including US Treasuries.
However, according to Eaton Vance’s high-yield portfolio manager, Kelley G. Baccei, and institutional portfolio manager high yield, Will Reardon, the asset class was reading tight for a reason, with the solid global economic backdrop and the credit fundamentals of high-yield insurers expected to modestly improve.
At the same time, despite this improvement, the high-yield sector could still potentially face a rash of defaults in the next economic downturn.
“Aside from the fact that predicting recessions is impossible, we think it could be a mistake to let these headlines impact a long-term allocation to high-yield bonds,” they said.
According to Eaton Vance, there were two assertions about high-yield bonds that could be misleading without the proper context:
- The level of global nonfinancial companies with high-yield credit ratings (below investment grade) has surged,
- Outstanding corporate debt has surged since the financial crisis and many firms are using the debt to finance dividends and share buybacks.
“We continue to see modest and consistent improvement in the credit fundamentals of high-yield issuers, and the makeup of issuance in the primary does not indicate elevated risk taking.”
AUTHOR
Oksana Patron
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