Posted inFixed Income

Are high yield’s new fans clutching at straws?

According to Bank of America Merrill Lynch data, $2.9bn flowed into high yield funds over the past four weeks, the largest amount over such a period since early 2012.

The asset class has certainly delivered for investors who got in during February, as the chart here shows.

Whether this is a reflection of investors’ desperation or whether the recent good performance is tied to the underlying fundamentals and macro picture is debatable. 

On the cynical side of things it can be argued that stalling equities markets and stagnant investment grade fixed income have made investors turn to high yield by default. Investors do not want to leave money sitting in cash either, earning nothing or worse than nothing as central banks outside of the Federal Reserve race to the bottom on interest rates.

Looking again at the chart above it would not be outrageous to suggest the recent spike is just the latest up in a perpetual series of peaks and troughs for the asset class.

Also worth noting is the fact that the recent rally has only brought the asset class back to where it started a year ago.

If the dearth of other options is largely responsible for the rush of money recently, then a short term bubble will develop, and inevitably burst.

This will not necessarily be the case however, if you believe some fixed income experts.

The argument in favour of at least the US section of the asset class having genuine merit at the moment is well articulated by J.P. Morgan Asset Management Income Opportunity Fund manager Bill Eigen. “The bruised US high yield credit market is compensating investors incredibly well,” he said.

Part of the Bonhill Group.