In its monthly outlook, SEB revealed that the high yield segment of corporate bonds has performed particularly well, resisting the market instability seen in the spring and delivering consistently good returns since the beginning of 2011.
“This asset class will continue to benefit from the global economic upturn, increasingly strong corporate finances and prospects of fine risk appetite, together with investors’ search for high yields,” SEB’s outlook stated.
As an example, SEB cited American high yield bonds which currently offer an average effective return of nearly 7%, compared to about 4.5% for investment grade and around 3% for government five year bonds.
The group predicted that OECD long and short-term government bond yields would likely rise and the supply of corporate bonds would continue to increase over the coming year. But it said the yield spread between corporate and government bonds would remain wide.
Again turning to the US as an example, SEB said that the yield spread on B-rated US corporate bonds remains wide at about 1.75% more than in 2005-2006, before the financial crisis. Meanwhile, the percentage of bankruptcies among high yield debt-issuing companies is continuing to fall. In the US it was around 3% and in Europe around 2% at the end of March on a 12-month basis.
SEB also noted that risks in this portion of fixed income were falling. This was attributed to the lower and lower percentage of bankruptcies recorded and the ever larger positive ratio between the number of US high yield companies that had received higher ratings and the number that had been downgraded.