Most high-yield bond funds don’t go below a certain risk.
However, the universe of bonds high yield is quite varied. Triple C bonds, for example, are referred to as distressed bonds, distressed bonds. These are the riskiest bonds on the market, but most high-yield bond funds don’t go below a certain risk. “Additionally, default rates in this asset class depend on the credit cycle. We thus had a peak in the default rate at 4.9% during the Covid period. The historical average for the entire universe is 3%. In January 2024, we were at 3.9% due to rising interest rates. At the end of April, the default rate was 3.7%”, specifies Alexia Latorre.
Two influencing factors
Two factors will influence the attractiveness of this type of investment. First there is the level of spreads. This is the difference between the rates displayed by the bonds high yield and those of risk-free bonds. “It must be recognized that today, spreads are quite tight. They are around 3.3% compared to a historical median of 4.5%”, notes this manager. Therefore, bonds in this category may seem expensive, but we must take into account a second element which is the yield of these bonds. Today, this yield over a maturity generally of 5 years is 6.9% for the entire universe of high yield. “This level of return is above historical medians. We have not achieved such returns since 2016. Today, inflows into this market are again at high levels due to these attractive returns”, recognizes Alexia Latorre.
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Today we are seeing a resurgence of issues on the primary market with maturities of 5 to 7 years. “We can then estimate that we are at an entry point into this market over a medium-term horizon. Returns are above historical averages with decreasing risk. The risk/return couple of this asset class is therefore interesting”. This manager recognizes that she does not make choices based on regions. Investments in this category are made by this management house exclusively on issues denominated in euros by practicing bond picking, a choice based on the quality of the transmitters. “We are diversified across 140 stocks. Today, we have a preference for the chemicals sector which offers attractive returns and is already showing signs of recovery in 2024 after a year 2023 where demand proved disappointing. The average maturity of the fund is 3.8 years”adds Alexia Latorre.
