This is part two of a two-part look at the current environment for credit markets. Read part one.

As strong as the market recovery has been year-to-date, investors searching for yield still need to take caution.

So says Nicholas Leach, vice-president of global fixed income at CIBC Asset Management, and lead manager of the Renaissance High-Yield Bond Fund.We’re still slightly below last year’s levels in terms of prices, returns, spreads and yields. We haven’t even earned the coupon over the past year, and I think there’s still a lot of ground to be made up in 2016.”

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He adds, “With spreads of around 565 basis points [as of the first week of August], that’s still wider than the historical median by about 100 hundred basis points. And this is in the context of extremely low yields globally, and negative yields in many parts of the world.”

Take Europe: “There’s about $280 billion in European corporate debt, and [there’s] a lot of corporate credit debt with a negative yield,” Leach notes. “That includes global conglomerates such as Procter & Gamble, Johnson & Johnson, BMW and Toyota. All of these companies are getting paid to borrow money.”

Read: $6 trillion in bonds trading in negative yield

This environment is pushing investors further into the credit markets, says Leach, “and that’s in regards to both investment-grade and high-yield credit. Within the context of the whole global fixed-income market, investors remain underwater in terms of yield.”

Quick word on liquidity

These days, “we typically have 1% to 2% in cash, and that’s a natural level because we’re constantly getting coupon payments coming in from the corporations we invest in,” says Leach. “We also like to have a little bit of liquidity in case there are any large redemptions.”

However, he notes, “[this] 1% to 2% level really doesn’t reflect the true liquidity that the fund has; a lot of the positions that we have can be easily liquidated in a very short period of time if we need to raise cash for any unanticipated redemptions.”


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