Allianz Global Investors US chief investment officer Doug Forsyth says the June sell-off in bonds has led to the prospect for “better-than-coupon-like” returns on US high yield for the rest of the year.
Despite posting a negative return in June sparked by concerns over rising interest rates, Forsyth points out that the coupons of high yield bonds act as a “buffer” for interest rate volatility.
Forsyth goes onto argue that the June sell-off was “more macro in nature than fundamentally driven” and did in fact create an opportunity in US high yield.
He says: “By combining the market reaction to the changing rate environment and the continued conviction that defaults remain low for the foreseeable future, the retreat in prices created an attractive opportunity.”
Overall the high yield market outperformed other fixed-income assets during the second quarter, explains Forsyth. Another ongoing advantage of high yield is the potential for spread contraction due to low credit risk, he adds.
Forsyth believes each of these factors have generated a promising outlook for returns on US high yield for the remainder of the year. He says: “We believe the prospect of achieving a better-than-coupon-like return is possible for the balance of the year.”
The investment case for high yield bonds in general still remains, Forsyth adds, and continues to keep investors “engaged”. He says: “Among fixed-income alternatives, high-yield bonds should continue to be a contributor from both a diversification and a relative-performance perspective.
“In addition, the lack of high-single-digit income alternatives has kept investors engaged.”