Despite ongoing market volatility and the current surge in interest rates, fixed income investments remain a compelling prospect for investors as potential yields in United States bond and credit markets have recently hit generational highs, according to an investment firm.
Income Asset Management distribution executive director Adam Muston suggested investors should reconsider high-yield bonds to take advantage of the recent market phenomenon.
“It is probably safe to say that the global economy is really starting to feel the weight of the recent rate hikes and investors may be starting to grow wary of corporate bonds,” Muston said.
“Instead of really bracing for that wave of downgrades and defaults, we definitely think income-seeking investors should really embrace high-yield [bonds] at the moment. Yields in the US credit markets are the highest they’ve been in a generation, with the high-yield and leverage loan market both yielding around 10 per cent at the moment of maturity.”
Income Asset Management head of credit and fixed income Daniel Saldanha added volatility in the last quarter and a significant re-evaluation of base rates in the US have combined to result in front-end interest rates exceeding 5.5 per cent and government bond yields nearing 5 per cent.
“We think despite the recent volatility, that is by and large a very positive thing for investors in the cost-of-capital matters. With base rates at about 5 per cent, there is now a real return across longer-dated bonds, even if it takes a little while for inflation to get back to target,” Saldanha explained.
“We’re now at a point where for the first time in 20 years, the yield in 10-year Treasury bonds are higher than the earnings yield in the S&P 500. That’s really unusual.
“The markets more broadly are yielding about 10 per cent across high-yield loans, which is material, and we haven’t seen that at a sustainable level for more than a generation. Just the hard mathematics means that with base rates readjusting, you’re in a really attractive place across credit markets.”
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