The trouble with high yield credit – why investors should be wary..
As central banks globally turn towards quantitative easing programs, it’s a hard market for income with interest rates at record lows. Focus in the income world is shifting to high yield credit, but investors should be wary – cheap returns may be too good to last.
High yield credit is returning 4.9% – over three times the return of the 5-year US Treasury bond at 1.6%. Spreads of 3.3% are tighter than even the most heady credit environment ever, which was less than the 4% in 2006. Worrying? Maybe.
While you could say this is cheap – for high yield credit to remain attractive, remember interest rates have to stay at zero for at least your investment horizon.
Given recent disappointing US growth data, it’s possible the credit market will earn a stay of execution. But the Federal Bank is not going to be the high yield market’s best friend anymore if it follows through on the monetary tightening plan it has communicated, even if the European Central Bank and Bank of Japan are still going hell-for-leather.
To find out more, read Vimal’s monthly commentary.