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Appetite for risk

When we last checked in on how DFMs’ favourite strategic bond funds were doing, the evidence pointed to a move along the risk scale. Go-anywhere managers were heading in the direction of high-yield debt at the end of 2020, a move made at the expense of investment grade positions.

Buoyed by the success of those decisions, this quarter has seen more of the same. Strategic bond funds have again upped their holdings of the highest-rated high-yield credit – those rated BB or B – at the expense of investment grade positions.

Add together those two quarters of activity, and the difference between then and now is pretty stark. The chart below shows how average credit ratings have changed since the start of October last year. Back then, BBB positions were well out in front. Riskier positions have taken over since then.

Given the government bond sell-off seen earlier this year, and the knock-on effect this had on investment grade debt, continued moves towards riskier bonds make sense. We’ve already discussed how many managers continue to view high-yield as something of a sweet spot, given the backdrop of economic recovery. And while DFMs are relatively reticent to buy dedicated HY funds, on this evidence their strat bond favourites are doing the job for them.

All the same, managers aren’t throwing caution to the wind completely. CCC positions are almost unchanged over the past half year. There has, though, been a continued uptick in holdings of non-rated debt, suggesting some strat bond portfolios are having to work harder to find the right securities.