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High yield issuances expected to reach record level in 2014

Against a backdrop of a low-rate, low-yield environment, investors’ hunger for attractive returns has grown stronger than ever.

The bond markets have been turned upside down with huge flows into corporate bonds, pushing down spreads.
 
With rates bottoming out and corporate spreads having normalised, is the great bull-run in bonds over?
 
Candriam’s recent research, entitled The end of cheap money?, investigates fixed income investing as monetary policy tightens and looks into ways to optimise risk/return potential in credit markets. It also details which strategies, in particular high yield strategies, are best adapted to benefit from credit opportunities and manage risk.
 
Patrick Zeenni, deputy head of high yield & credit arbitrage, says: “With the end of cheap money approaching, investors now face two major concerns that need to be addressed: the impact of rising interest rate on investment portfolios and how to find attractively priced yield. Investors must therefore change their fixed income investment decision-making process to address these new challenges. We firmly believe portfolio performance will now come from alpha generation.”
 
The key for many investors is to focus on alternative credit investment opportunities, such as high yield corporate credits which have a low correlation to interest rates movements, and offer more attractive yields, along with a flexible and dynamic management to mitigate key risks. Spreads have normalised, dispersion among securities is rising as normal macro and market environments return. Now more than ever, alternative credit strategies that profit from this environment must be considered in a global asset allocation portfolio.
 
Zeenni says: “With current assets representing over EUR1,300 billion globally, of which EUR280 billion in Europe, the corporate high yield segment still only represents approximately 25 per cent of the US market. But the depth of the market is significantly expanding by geography and sector, and we are seeing a significant increase in issuances in emerging markets and non-core European countries. Confidence around the high yield asset class is rising as the need for refinancing remains high. In addition, its ability to inject diversification in a portfolio is also crucial in today’s environment.”
 
Maintaining return whilst managing risk continues to be top of mind for all investor types. High yield strategies are the way forward, but depending on the investor’s risk profile, several approaches can be considered.
 
At Candriam, the high spread strategy combines a short duration bucket and an opportunistic one with tail risk hedging (mid volatility target).
 
Two other approaches with different volatility profiles could be considered: low volatility with long-short credit strategy (highly opportunistic with a limited high yield net exposure), and higher volatility benchmarked high yield strategies (actively managed and high-conviction, based on bottom-up bond selection).

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