Although high-yield bonds are near historical lows at 5.3%, spreads and credit quality are improving.
“We really need to look at high-yield spreads in the context of the credit cycle,” 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. “We have spreads that are below average, but we have credit quality that is above average.”
High-yield bonds are 350 basis points above 10-year Treasury bonds — lower than the historical average of 500 bps above.
But, Leach says, “350 basis points is still about 100 basis points wider than it was if you go back to 2007 and other areas in the credit cycle where credit quality was high.”
And, high-yield bonds are 250 basis points above investment-grade bonds, which are running at 2.8%. He adds there’s lower duration risk associated with high-yield bonds, since they are short-term vehicles.