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The problem with owning high yield bonds right now

The problem with owning high yield bonds right now

High yield bonds are “in theory” well-placed to perform well right now but worsening sentiment around the wider economic outlook means the asset class is unattractive in the current climate, according to David Jane, who jointly runs a range of multi-asset funds at Premier Miton.

High yield bonds could be attractive as a protector against inflation as the yields have more capacity to protect spending power, while the fact economies are growing makes it more likely that the companies will be able to generate sufficient cash to pay the bondholders. 

Jane said: “In theory the higher yields and shorter duration ought to mean they are better than IG [investment grade] which has broadly been the case, but as people have begun to worry about the economy, spreads have begun to widen, making it a bit tougher.”

More broadly, Jane is sceptical about the efficacy of owning any bonds in a portfolio. 

He said: “We take the view that basically you need to be very short duration –  for example, we are less than 2.5 years on all the funds, with better quality credit. We have even been buying FRNs [floating rate notes]  where the only risk is spread but yields can be 5 per cent.

"The big problem is all bond asset classes look set for negative longer term returns, so basically you are dancing around between credit, EM, high yield depending on what is working near term but into an ongoing headwind. 

"We prefer minimum bonds and gold, commodities and Reits as preferable diversifiers.” 

David.Thorpe@ft.com