Outlook for high-yield bonds

High-yield bond returns are up around 4% in Canada, and they’ll continue to increase.

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“We thought [high-yield was] going to be the better performing sector in the fixed income market, and that’s largely happened this year,” says Patrick O’Toole, vice president of global fixed income at CIBC Asset Management. He co-manages the Renaissance Canadian Bond Fund, an underlying fund in the Renaissance Optimal Income Portfolios.

Still, there have been patches of volatility, he adds. “We saw spreads in the high-yield market go as low as 330bps in June of this year, and in early October we saw them widen out as far as 500bps. Now, [spreads] have come back down to about 430bps.”

Read: 4 obstacles to high-yield returns

But investors shouldn’t be worried,” he notes, since “we tend to have one of these episodes each year, where spreads widen out…Investors have looked at the high-yield market and say it still looks like it’s on decent footing.”

Throughout the year, says O’Toole, “the [high-yield] market was influenced by ETFs, hedge funds and [so-called] fast money accounts, and that’s increased the volatility and moved spreads around more than we might have expected.”

Read: Don’t bet against bonds

As well, the recession in Europe and global concerns about China have negatively impacted the performance of the fixed income market overall. “So government bond yields have actually moved lower.”

Read: Don’t give up income for security

Alternatives to high yield

If your clients find the high-yield sector too risky, turn their focus to investment-grade corporate bonds, which are decently valued, says O’Toole.

In that space, he finds the compensation decent since investors are currently getting “more than a full percentage point of extra yield.” Comparatively, Government of Canada bonds offer a yield of around 2%, which means investment grade corporate bonds post almost a 50% increase in yield.

Read: How to manage a bond portfolio

Even better, U.S. economic momentum should help steady Canada’s economic performance going forward, which should improve the environment for investment-grade bonds.

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