Short-dated high yield bonds are a choice investment argues AXA IM’s Theodora Zemek
AXA IM’s global head of fixed income Theodora Zemek maintains high yield corporate bonds of short duration are the best option for institutional investors today.
The convulsions in financial markets over the Eurozone sovereign debt crisis and the stuttering US economic recovery are rapidly reducing options for institutional investors. There are few signs of robust growth in developed countries, and while the US economy will probably be the engine that eventually pulls the world economy back up, it certainly isn’t anywhere near that point yet.
For investors, this means that it’s actually very hard to be cautious at the moment. There is no real return on cash and if you put your money in the bank, that has major credit implications in Europe with the deterioration in the outlook for banks’ solvency. A lot of European government bond markets also look unattractive as the sovereign debt crisis deepens. With no real drivers of economic growth in sight, that takes equities off the table and leaves high yield bonds as the best man standing.
The knee-jerk reaction from investors in this situation is to sell equities and to sell the closest thing to stocks in fixed income – high yield. But with default rates low, I think that unusually for this point in the economic cycle, high yield is a really good place for investors to be right now.
High yield corporate bonds of short duration stand out in this environment. We favour US and European short duration high yield of under four years maturity, because of the relatively attractive risk/return profile available in sections of the market, with yields hovering around 9% and corporate profitability and cash balances holding up well.
Theodora Zemek is AXA IM’s global head of fixed income.