Despite narrowing spreads and a slowing economy, high-yield bonds continue to be appealing.
It’s been a record year for high-yield or junk bonds, says John Braive, vice chairman of CIBC Asset Management. He co-manages the Renaissance Real Return Bond Fund, Renaissance High-Yield Bond Fund and Renaissance Canadian Bond Fund.
He adds there are a number of factors driving that growth, such as the good cash flow into junk bonds from both the retail and institutional sides.
“The demand has been there [and] the economy has been doing well enough for corporations to show profit growth and improving credit fundamentals.”
Corporations borrowing in the marketplace also have improved interest-coverage and debt-equity ratios.
“These are crucial fundamentals for high-yield bonds,” says Braive. “If they’re improving, it’s a good sign for credit overall.”
At the beginning of this year, he says these bonds had a spread over U.S. Treasuries of about 750 basis points.
Back in August and September 2011, the U.S. and Greece were grappling with the debt issue, forcing credit spreads to widen. And since then, spreads have improved consistently.
“Today, the spread is down to 500 basis points,” says Braive. “It’s contracted and the yield has gone down on high-yield securities; you’ve also had capital gains of about 4%-to-5%, [while] returns on high-yield bonds are looking like 12%-to-13% this year.”
While some say bonds are past their prime—550 basis points is getting close to the long-term average yield spread over treasuries—he says they’re still a good place to park your money.
High-yield bonds today offer 6.6% yield, including 1% from U.S. treasuries.
“That’s well above the inflation rate, and well above the growth rate of the economy,” Braive adds.