High yield to lead the way in bonds
David Daigle, portfolio manager in Capital Group’s fixed income team, believes we have probably already seen the lows in default rates in high yield for this cycle.
“Keep in mind this is an area of the bond market that is yielding 7% in a world where investment-grade credit is yielding 2% to 3% and a 5-year Treasury, which has the most similar duration to the high-yield market, is yielding about 1.5%,” he explains.
“So, investors are getting a lot of spread over either cash or Treasuries of comparable duration, and I think that means it’s a hard asset class to not own in this environment.
“Hypothetically, even if you have default rates of 400bps and you take 50% losses on those defaults — that’s a 200bps drag on a 7% yield — you’re still earning about 5% in a zero interest-rate environment.”
So there’s some of the most compelling reasons to be optimistic for 2016, and we haven’t covered the (relatively) strong domestic economy in the UK, and what many are seeing as big opportunities again in Japanese and European equities.
Whether or not economists’ predictions prove to be on or wide of the mark, next year promises to be a fascinating one for macroeconomics, managers and markets alike.
