US high yield has outperformed with rising energy prices, but has little bearing outside commodity sector

9th May 2016

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The US high yield bond sector has outperformed this year, but investors need to understand that the improvement underpinned by energy prices may have little impact outside the commodity sector.

US high yield bonds have rebounded this year by 12% since February and high yield has now outperformed most other asset classes, including the S&P 500, the FTSE 100, 10-year US treasury bonds and both emerging market debt and equities.

David Absolon, Investment Director at Heartwood Investment Management says: “This positive outcome, as measured by the Bank of America Merrill Lynch US High Yield Index has shown returns of 13% in the energy sector and 19.57% in metals and mining. David suggests that much of this positivity in the market has come from reduced concerns about US recession risk, as shown by the halving of distressed debt from 20% to 10% since February this year. As a result of the better tone in credit markets, demand for high yield funds has outstripped supply since mid-February, providing another underpin to the asset class.

“Firming oil prices have done nothing to improve the below average default rate outside the commodities sector, and along with the slow but sure increase of core inflation, and the still absent recovery of the manufacturing sector, there are still that many challenges that the commodity sector will be facing in the long run. There is hope for one sector however, with high yield energy being one of the few areas of the market that offers value and where the yield cushion is sufficient to mitigate the potential for future capital loss.”

 

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