High yield stands out as last pocket of return as bond markets make losses this year

Nearly all bond sectors are in the red this year. With losses across the sector, high yield is standing out as the last area of decent return, according to experts.

 

Four out of six Investment Association bond sectors have made losses in sterling terms this year, including global and emerging market bonds, corporate bonds and gilts.

 

The two exceptions are the strategic bond sector, which has made a 0.96 per cent return so far this year, and sterling high yield, which has much better performance of 2.72 per cent. 

 

“Bond markets face a much tougher environment as rates start to normalise, but investors need not fear an Armageddon-style scenario for fixed income,” says Stephen Jones of specialist investment manager Kames Capital.

 

Bonds are in the midst of a decade-long bull run as yields have fallen to record lows, and in the case of Swiss, German and Danish government bonds, are offering negative nominal yields. 

 

The last quarter has been “the worst ever” for European government bonds, Jones said.     

 

Opinion is divided over the potential impact of interest rate rises on the high yield sector, as raising borrowing costs for these businesses could mean more of them default on their debt. "We are not expecting a big surge in defaults for high yield, and they will not be anywhere near as high as investors fear in areas such as energy," Jones added. 

 

But much depends on pace and scale of rate rises, as at the moment many experts are predicting they will only rise in the US by 0.25 per cent before more movements next year. High yield has provided positive returns during some previous periods of rate hikes. 

 

“The Federal Reserve will only raise rates if it assesses that the economy is on an improving trajectory," says Michael Scott of fund manager Schroders. 

 

"High yield, as it has done in past hiking cycles, should deliver positive total returns as the high coupons and carry of the asset class are able to offset the rise in underlying yields.”