Caution warning for investors banking on high-yield bonds

Improving economic data, tightening credit spreads and fund inflows, along with generally improving economic data have seen high-yield bonds emerge recently as a solid investment option, but Eaton Vance has cautioned investors on the realistic longevity of their success.

Eaton Vance high yield portfolio manager, Kelley G. Baccei, said allocation to high-yield bonds had accelerated in the wake of the US Presidential election, but that investors would be wise to limit activity in the long-term.

“We continue to anticipate that the economic policies of the Trump administration will be supportive of U.S. economic growth and help to lengthen the current credit cycle,” she said.

 “Given current valuations and credit spreads, we think investors should temper their expectations after the recent rally.

 “Investors who want to take a more defensive stance might consider more conservative positioning on both credit and duration.”

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Baccei said that while market trading was tight and valuations were full, high-yield bonds relied on the health of the economy, and tightened credit spreads in a low-volatility market had been the catalyst for the most recent rally.

“The BofA Merrill Lynch US High Yield Master II Index gained 17.5 per cent in 2016,” she said.

“Since the election, the average yield on the BofA Merrill Lynch US High Yield Master II Index has compressed by approximately 80 basis points to 5.76 per cent, as of February 20.

“Over the same period, the average yield on CCC-rated bonds, the riskiest segment of the market, has compressed by over 300 basis points.”