High yield bonds are the most likely sector of fixed income to outperform as markets react to the tapering of quantitative easing in the US, according to Schroders’ Wesley Sparks.
Mr Sparks, who works on four bond funds including US dollar, corporate bond, and global high yield strategies, predicted total returns of 7-8 per cent in 2013, driven largely by coupon payments rather than price increases.
He cited the sector’s lower sensitivity to changes in government bond yields as a key positive for the sector.
“Typically a rising rate environment is associated with stronger economic growth and stronger growth is beneficial for high yield credits, so often the risk premium can compress even as benchmark US Treasury yields rise,” Mr Sparks said.
In common with many other bond managers Mr Sparks said he was reducing the duration of his funds - a measure of their sensitivity to changes in interest rate expectations. He has also cut back his exposure to BB-rated bonds, which tend to trade relative to government bonds more than lower rated bonds.
But he added that “other risks may emerge in the autumn that the market is not yet particularly focused on” due to being preoccupied with the potential changes to QE expected to be announced by the Federal Reserve next month.