double-rainbow-returns

The high-yield market has nearly doubled over the past five years to US$1.3 trillion.

“Part of that is because prices were depressed five years ago,” says Nicholas Leach, vice-president of global fixed income, high yield at CIBC Asset Management. He is lead manager of the Renaissance High-Yield Bond Fund.

Read: 4 obstacles to high-yield returns

“But in addition, the new issue market has reached record levels of about $300 billion a year. And while 60% of the proceeds have been used to re-finance existing debt, a lot of companies have diversified their funding sources away from just bank loans. They’ve grown to the size where they can go to the high-yield market.”

Equity markets are also up 50% from two years ago. As a result, companies that previously had pension deficits are now posting surpluses. That’s also due to the rise in treasury rates.

Read: Surprise! Corporate pensions are okay

“Once the credit rating agencies start to acknowledge that, we could see some upgrades, just because of the improvement in those off-balance-sheet obligations,” says Leach.

And, the default rate was below 1% in 2013, and will likely stay below average for the next three or four years.

Read: Seek safety in senior debt

Finally, interest coverage ratios are strong, as is primary-market issuance, leading to strong credit quality. “Many companies have refinanced high-coupon bonds with low-coupon bonds, and they’ve also extended the maturities,” says Leach.

Originally published on Advisor.ca

Add a comment

You must be logged in to comment.

Register on Advisor.ca