Will HY investors regret riskier purchases when the cycle turns?

HIGH YIELD

High yield investors moving up the risk spectrum in order to secure higher returns are not being adequately compensated, says Stephen Baines, fund manager in Kames Capital's high yield fixed income team.

The last two years have been a very rewarding time for high yield investors in Europe, with cumulative total returns of 42% on the Bank of America Merrill Lynch European Currency High Yield Bond index (see figure 1 below). The starting yield on the index in autumn 2011 was roughly 10%, and yields have since halved – mainly driven by declining credit spreads – providing investors with substantial capital gains. The current index yield of 4.74% is almost a record low. For many high yield bond investors, and their investment managers, yields of around 5% are insufficient to satisfy their...