Todd Youngberg, Global Investment Director \u2013 Fixed Income and Head of High Yield
\nInvestments at Aviva Investors, provides his views on the outlook for high yield bonds and the
\nopportunities that the asset class has to offer.<\/p>\n
<\/p>\n
\u201cThe global high yield bond market has made off to a good start in 2011, with returns of
\napproximately 3.2%[[Data according to Bank of America Merrill Lynch]] through mid-March. High yield bonds have been resilient during the recent
\nequity volatility. Demand for high yield bonds has been strong, with mutual fund inflows of US$9
\nbillion, or 4.6% of fund assets, year to date, according to AMG Data Services. We are also seeing
\neven larger demand for leveraged loan funds in anticipation of hedging inflation risks due to their
\nfloating rate structure.\u201d<\/p>\n
\u201cThat said, the yields in high yield bonds are near all time lows at just over 7%[[Data according to Bank of America Merrill Lynch]], and we therefore reiterate return forecasts of 7% to 8% for high yield bonds and 6% to 7% for leveraged loans for 2011. These remain attractive rates of return when compared to investment grade fixed income alternatives.\u201d<\/p>\n
\u201cWhile yields are low on a historical basis in the high yield market, we are seeing opportunities to
\nincrease total return by finding bonds with the potential to \u2018cross-over\u2019 into the investment grade
\nuniverse. Upgraded bonds become open to a larger universe of buyers and typically have price
\nappreciation as their risk premium, or spread, narrows. For example, a BB+ rated bond such as
\nMacy\u2019s, the department store, trades with roughly a 5%[[Data sourced from Bloomberg]] yield, however a potential return would be closer to 9% if the bond is upgraded to investment grade as its spread tightens.\u201d
\nA number of key market indicators support a marketweight allocation to high yield bonds and
\nleveraged loans:<\/p>\n
1. Global default rate is low and expected to fall further:<\/strong> The probability of default has been 2. Low real rates supporting narrow high yield spreads:<\/strong> A low real rate environment has 3. Credit rating trends most favourable since 1998:<\/strong> Strengthened corporate balance sheets Todd Youngberg, Global Investment Director \u2013 Fixed Income and Head of High Yield Investments at Aviva Investors, provides his views on the outlook for high yield bonds and the opportunities that the asset class has to offer.<\/p>\n","protected":false},"author":20,"featured_media":17743,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[1480],"tags":[1655,1681,1651,1756,1812],"_links":{"self":[{"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/posts\/17745"}],"collection":[{"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/users\/20"}],"replies":[{"embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/comments?post=17745"}],"version-history":[{"count":0,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/posts\/17745\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/media\/17743"}],"wp:attachment":[{"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/media?parent=17745"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/categories?post=17745"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/tags?post=17745"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}
\nlessened by firms\u2019 extensions of maturities at attractive rates, large cash balances, improved
\noperating leverage and higher profit margins.<\/p>\n
\nbeen accommodative for the high yield market, helping provide a low cost of capital for
\nrefinancing and extending maturities.<\/p>\n
\nand robust earnings support a credit rating upgrade environment and the trailing 12-month
\ndowngrade\/upgrade ratio is near an all time low.<\/p>\n","protected":false},"excerpt":{"rendered":"