The high-yield bond market is expected to go through a period of volatility following the recent rally, but Eaton Vance says the asset class is still an attractive option for income-seeking investors.
Current fundamentals appear supportive of high-yield bond returns, according to Eaton Vance high-yield portfolio manager Kelley Baccei, who said high-yield is not presently overvalued, despite narrowing credit spreads.
“[Credit spreads] are only slightly below their 20-year average, so high-yield isn’t overvalued based on historical levels,” she said.
Ms Baccei warned investors not to expect recent performance to repeat, but added there is “still opportunity” for long-term investors so long as they are prepared for “some volatility”.
While high-yield default rates rose to 3.6 per cent in the second quarter of 2016, Ms Baccei noted this risk was “highly concentrated” in energy and mining, and default rates fell to 0.5 per cent when these sectors were removed.
Ms Baccei also pointed out that demand for high-yield bonds had “rebounded” in 2016, with supply decreasing by 19 per cent for the first half of 2016 – a trend Eaton Vance expects to continue in the second half of the year.
“Rising defaults, geopolitical risks, and concerns over global growth and commodity prices may cause volatility to rise; still, for long-term investors, overall solid fundamentals and the ongoing search for income are supportive of high-yield bonds,” she said.