Fixed Income  

Aviva Investors warns on high yield returns

High yield bonds face several headwinds this year and may have limited potential for returns, Aviva Investors has warned.

Todd Youngberg, head of high yield at Aviva Investors, said positive news was “nearly all baked into current valuations”.

He said the average price of a high yield bond was $104.1, compared with a ‘par’ value of $100, meaning investors were on average paying more to buy bonds than they stand to collect when the assets mature. Mr Youngberg said this “limits additional price appreciation”.

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Among the risks the manager highlighted was the potential for high yield bonds to become more correlated with investment grade and government bonds as prices rise. Such bonds are more sensitive to movements in interest rates and stand to fall in price when rates rise.

“We believe that with the current spread and yield levels within high yield corporate bonds, it will be difficult to receive strong returns without taking on risk,” Mr Youngberg said. “High yield bonds are expected to provide diversification away from rate risk at a time when the probability of default continues to be low, but investors should taper return expectations.”

He added that increased retail ownership of high yield bonds through mutual funds could lead to large redemptions at times of stress, which could be excerbated further due to a fall in the number of banks and other companies providing liquidity.

However, Mr Youngberg said high yield would still outperform other areas of fixed income.

“We continue to believe that high yield bonds will outperform more interest rate sensitive asset classes,” he said. “Yields on high yield bonds have been on a declining trend and are now below historical highs.”