High-yield bonds and emerging market debt – Divergent fates

While emerging market debt saw record quarterly inflows globally during the third quarter of 2016, the global hunt for yield does not benefit developed market junk bonds. But this could soon change.

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PA Europe

Interest in high-yield bonds and emerging market debt picked up in March this year after a winter marked by strong outflows from both asset classes. However, while EMD fund inflows kept pace, with €29bn flowing into the asset class since then, high yield bond funds have attracted a mere net €6bn over the same period. 

A similar gap can be observed in Expert Investor’s asset allocation sentiment data. High yield bonds were the more popular of the two asset classes with European fund buyers at the start of the year, but emerging market bonds have been their favourite for the past two quarters.

 ighyield bonds High-yield bonds

Those intending to increase their allocation to high yield bonds match those planning to cut exposure, while emerging market debt sentiment is riding high: over a third of European fund buyers are intending to increase their exposure to the asset class. This sentiment gap probably goes some way in explaining the discrepancy in fund flows that has emerged over the course of the year.

Watch the Fed

And indeed, there is currently a strong case to make for emerging market debt, as we reported last week. US high yield bonds, on the other hand, have reached their highest default rate in six years because of their high exposure to the energy sector. The high-yield market of Europe’s biggest oil producer, Norway, is experiencing similar issues. According to a fund analyst working for a Norwegian pension fund whom Expert Investor’s local researcher met recently in Oslo, 40% of Norwegian high-yield issuers are currently on the verge of default.