Where did all the yield go?

Yields are low, but still positive, in what was once known as ‘high’ yield. Equally, though, we also know that there are a lot of negative-yielding bonds in the world. So in the ongoing search for income, so-called ‘junk’ bonds continue to look attractive to many investors.

And apart from a yield higher than in most other fixed-income assets, we should also consider the impact of survivorship bias (as only stronger issuers remain) and the huge global economic stimulus. Both should keep default expectations low across the world, in our view.

Indeed, having seen a record number of downgrades over the past couple of years, we should now see movement in the other direction. Rising stars, rather than ‘fallen angels’ whose ratings have dropped below investment grade, could be the talk of the town.

In addition, high yield is a relatively low-duration asset class. We believe this should make it less susceptible to movements in future inflation expectations and the corresponding changes in government bond yields.

Putting all this together, in my view the situation facing high yield is now similar to what we have seen following crises in the past. As the charts below show, I believe we are still likely to have some reasonable spread tightening ahead of us.