High yield: Has liquidity risk premium been squeezed out?

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High yield investors are not being adequately compensated for liquidity risk, argues David Vickers from Russell Investments.

Federal Reserve chair Janet Yellen made the case succinctly when she told the US Congress that valuations appear to be “stretched” in the lower-rated corporate debt space. They undoubtedly were, with spreads trading at their lowest level since the financial crisis, at 340bps. Liquidity premium However, the main risk is not in valuations in relation to default risk, but in the lack of illiquidity premium offered to investors. High yield bonds have always been relatively illiquid, but recent changes to bank regulations have caused investment banks to reduce their inventory, or sto...

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