How sub-par bonds are delivering prime value

HIGH YIELD BONDS

Fraser Lundie, co-head of Hermes Credit, explains why quality bonds unpopular with rate-wary investors offer good value in today's high yield market.

Fears of rising interest rates, based on the US Federal Reserve’s talk of reducing its stimulus program, spurred a sell-off of good-quality bonds in May. They have not recovered – even after the central bank refrained from ‘tapering’ its asset purchases in September. Top-rated bonds in the high yield market have less credit spread as a percentage of overall yields. In other words, they provide a thinner cushion against the impact of rate hikes. Amid ongoing stimulus, the nomination of a dovish official to lead the Fed and the Bank of England committing to keep rates low until UK unemploy...