Over the past four years, high yield bonds have been one of the most profitable investments. Now investors are wondering what will happen when the Federal Reserve revises the ultra-expansionary monetary policy adopted to exit the crisis.
With government bond yields at rock bottom, high yield bonds have taken center stage as tools for portfolio diversification. According to Jim Keenan, head of Leveraged Finance at BlackRock, "Returns over the next couple of years are likely to differ from those seen in the recent past, but should still remain attractive, especially relative to fixed income alternatives."
Dollar or Euro?
For a European investor, the reference markets are those in euros and dollars. The latter is five times larger in terms of capitalization, has higher liquidity and lower volatility. Furthermore, the issuing companies are mainly domiciled in the United States.
In terms of duration, historically shorter maturities have outperformed or outperformed the broader market with lower volatility. "Looking forward," reads a note from Source, "investors may look to shorter duration issues to reduce the negative impact of rising interest rates or widening spreads." For example, a basket of high yield with four-year effective duration could fall 4% if interest rates rise 100 basis points. If the years drop to two, the loss will be 2%.
The choice of short-term securities is more defensive, so they tend to underperform the market in periods of strong economic growth, in which spreads (differentials with respect to safe securities) narrow.
Wallet satellites
Among the ETFs covered by the Morningstar analysis, iShares Markit iBoxx $High Yield Capped Bond, listed on Borsa Italiana, offers exposure to the US high yield market. The main alternative, explains José Garcia Zarate, an analyst at Morningstar, is Source Pimco Short-Term high yield corporate bond ETF, listed on the London Stock Exchange, which specializes in the short end of the yield curve. Other replicants cover European issues including iShares Markit iBoxx Euro High Yield Bond, Lyxor ETF iBoxx EUR Liquid High Yield 30 Ex-Financial e SPDR Barclays Capital Euro High Yield Bond, all three listed on the Italian Stock Exchange.
Due to their characteristics, these ETFs are well suited to have a satellite role in the portfolio, says Garcia Zarate. Furthermore, in the case of issues in dollars, Italian investors must take into account the exchange rate risk.
Attachments: Article taken from Morningstar
