Keeping Pace in High Income Today: Bet on Multiple Horses
Market conditions may change in 2018, and that’s good for income-oriented investors. Yes, interest rates are rising and some assets look expensive. But there are still plenty of horses to ride in this race.
The ride may be rough at times, and assets will go up and down. To keep pace in this environment, investors will need a strategy that embraces multiple sectors and is able to go anywhere around the world to generate income.
Take high-yield bonds. They’re a core component of any high-income strategy—and with good reason. High yield usually does well when rates rise, because rising rates usually go hand in hand with improving economic growth, which leads to higher corporate profits.
Last year, short-term interest rates rose slowly but steadily in the US and began heading higher in Canada and the UK. And high-yield bonds and other credit securities delivered strong returns, thanks in part to solid global growth.
On the other hand, unusually loose global central bank policy over the last decade has helped to extend credit cycles and raise asset prices in many parts of the world. Today, US and European high-yield credit spreads—the extra yield these bonds offer over comparable government debt—are at multiyear lows.
Don’t Sweat the Default Rate
Could higher borrowing costs result in more high-yield defaults in 2018? Possibly. Last year, default rates among US and European high-yield companies hovered near historical lows. In the US, they were actually declined as the energy-sector defaults that accounted for nearly two-thirds of the total in 2015 and 2016 combined, subsided.