The Great Rotation, where investors flee from bonds to equities, is not likely to happen, agree Dan Bastasic and Ben Cheng, portfolio managers with IA Clarington Investments.
Both indicated there will be inevitable movement toward equities as the North American economy recovers, but it won’t be in one swoop. Plus, while investors should ease off of unstable government securities, they can replace them with corporate bonds.
“If you want interest-rate protection and decent value, focus at least for the next year on high-yield corporate bonds,” says Bastasic. “Some of these income sectors have been battered in the last month and a half, and are starting to look very decent from a total-return perspective.”
Cheng notes the high-yield bond market is returning 6.5% to 8% to investors while a REIT currently yields anywhere from 5.5% to 7.5%. “Now that yields are at more compelling levels, you’re going to see interest [in bonds] pick up again,” he explains.
Financial speculators question whether high-yield bonds are overvalued, but both portfolio managers disagree with this prospect. Cheng says large-scale ETFs and the largest high-yield bond funds have been driving the BofA Merrill Lynch US High Yield Index, “but outside the index, if you’re willing to roll up your sleeves and do the credit work that’s necessary, you can still buy decent-quality high-yield bonds with short maturities offering investors 7 to 8% return.”
Bastasic adds he’s been talking to clients about the technical sell-off of bonds in the last few months. “There was an expectation that rates were going up, and interest-rate-sensitive assets were going down, so you saw an exit [from bond] ETFs,” he explains. “But this is a market that’s providing 7% to 8% yield if you’re selective and picking off names that you’re not going to see in the ETF.”