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High Yield Bonds, Short Duration

High Yield Bonds
Fixed Income

Aa lot High Yield Bond research is happening behind the scenes

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High Yield is currently being researched intensely. Versus Global Government Bonds or Investment Grade Credit the yield on High Yield Bonds is high. But that investment argument is too simple. Here's what potential High Yield Bond investors are researching:

Are High Yield Bond Markets Cheap?

To answer this question, investors are comparing views on default rates, recovery rates to calculate their expected loss versus the current spread. Only then can they decide whether high yield bond markets are cheap, or not cheap enough. This exercise is also being performed for U.S., Europe and Emerging Market High Yield Bonds. What is interesting is that expected default rates vary widely across high yield bond investment managers.

What Is the Expected High Yield Bond Default Rate?

The variation in expected high yield bond default rates is being driven by two factors: Firstly, investment managers views inside RFPnetworks differ widely on the global economic outlook -  growth, interest rates and inflation forecasts. The resultant assumed economic base cases cover a wide range of scenarios. From a shallow recession to prolonged stagflation. And this varies again on a global and regional level (U.S. versus Europe versus Emerging Market economic outlooks).

The second related issue is whether the relatively strong fundamentals can be sustained. Corporate EBITDA is under pressure from rising rates, a strong dollar, rising input costs (e.g. tight labour markets) and the prospect of renewed supply chain constraints as Chinas buckles down on COVID again. So whilst EBITDA estimates have been revised down, the question is whether this is the start of some serial correlation. We've had the first downward revisions, but may be not the last.

Are Short Duration High Yield Bonds The Best Option Today?

The research in this area is getting interesting. Investors are focussing on three characteristics of the short duration high yield bond market: Firstly, they are comparing yield levels on short duration bonds products to the broader high yield and investment grade bond market. And given the wide variation in economic outlooks across investment managers, they are analysing how short duration bonds perform in rising flat and falling rate scenarios. And then looking at the risk adjusted returns of short duration bonds versus the broader high yield market.

Short Duration Bond may look relatively attractive. But before a decision to invest gets a sign-off, a lot of research is happening behind the scenes with potential high yield investors. And only then does the real research begin. How do you  find the best high yield investment manager for the current market environment and the diverse future economic scenarios that can happen.

Aegon Asset Management
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Are 5 Consecutive Months of Negative High Yield Performance Possible?

Only three times in history has High Yield delivered 4 consecutive months of negative monthly returns. That's what's happened in 2022

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High Yield Bonds had a tough first quarter in 2022 as investors computed the impact of 3 interconnected factors on the asset class.

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