Posted inFixed Income

High yield bonds in sharp sell-off

High yield bonds fell from top to bottom in the European sales charts over the course of one month, with net sales falling from €7.1bn in April to €-3.7bn in May. Almost all outflows came from active funds. US high yield bonds funds were responsible for the bulk of these, seeing net redemptions of €2.2bn.

But European high yield bonds also saw outflows, and these could have something to do with investors taking risk off the table in the run-up to the UK’s referendum on EU membership. At least, that was the main thing on Frank Reisbøl’s mind when he decided to ditch his complete exposure to high yield bonds in May.

High yield bonds make nervous

“We took all our money out of high yield bonds and converted it to cash at the end of May,” says Banque Carnegie’s managing director, who is based in Luxembourg. The move was part of a wider operation to reduce risk in his portfolios anticipating on a possible Brexit vote, he adds. 

“High yield bonds is the asset class that is most vulnerable to what investment banks do, and most of these are based in London,” says the Dane. “If they get nervous [after a Brexit vote], they will take liquidity out of the market.”

But perhaps Reisbøl’s low trust in the resilience of high yield is a reflection of a wider phenomenon: popularity of high yield bonds never really seems to stick. Contrary to most other asset classes, net buying spells seldom last longer than a few months. This pattern that has intensified over the past two years or so. We’ll investigate the underlying causes of this in a follow-up article later. Stay tuned. 

Part of the Bonhill Group.