3 Reasons To Underweight High-Yield Debt

November 11, 2014

2007_Vs_2008_Returns

 

Investors today, we would argue, have significantly greater exposure to the corporate and high-yield space by virtue of the different “income” and “unconstrained” bond funds being offered.

There are three ways to generate incremental yield in today’s market: use leverage; extend duration; or take credit risk. While some funds incorporate all three measures, many are strictly relying on credit risk to generate a return in excess of 4 percent.

Nottingham’s own Global Income portfolio has employed taking credit risk extensively over the past few years. More recently, however, we have actively pared back exposure to areas such as high-yield debt, bank loans and emerging markets. The risk/reward trade-off is no longer adequate, in our opinion.

We actively reduced our exposure to high yield in the second quarter of 2014. The recent pullback in high-yield spreads has given us an opportunity to re-enter the space. However, the pullback fell short of creating a true buyer’s market, as the global-equity rally drew investors back into the risk trade.

 

Find your next ETF

Reset All