Hermes' head of credit warns of 'intense' race to the bottom in high yield

Hermes' co-head of credit Fraser Lundie is buying into BB bonds over fears of a ‘race to the bottom' in high yield credit.

In contrast to the rest of the bond market, the high yield sector enjoyed a bumper year in 2013, with the Barclays high yield index returning 10% as investors fled from government bonds. High yield spreads over government bonds have reached their lowest levels since before the crisis. The spread on the Bank of America Merrill Lynch High Yield Master index dipped below 400bps last month, a six-year low. As a result, high yield investors are piling into risky CCC securities, inflating prices to levels well above the call price and allowing small companies to issue or refinance debt. ...