Fed's rate hike raises concerns about high-yield fixed-income assets

NOW that an unprecedented era of near-zero interest rates has come to an end, as the Federal Reserve raised rates for the first time in nine years, Asian investors will grapple with pointed questions about their fixed income portfolios in the near to mid term.

Over the past few years, investors have gravitated strongly towards fixed income assets particularly high yield bonds, thanks to the asset's higher recurring income. Until recently, that faith has been rewarded. Even as private bank strategists repeatedly called for an overweight in equities, the "great rotation'' from bonds into equities has not quite happened among private clients.

But the recent sell-off in the high yield market and news of redemption freezes of three mutual funds in the US have sparked fear. Last week, news hit that Third Avenue Management barred its US$788 million fund from redemptions. The fund invests in the highest risk unrated segment of credits. Then, Stone Lion Capital also suspended redemptions from its US$400 million credit hedge fund. A third manager, Lucidus Capital Partners, has liquidated its US$900 million credit portfolio and will return funds to investors. Year-to-date, the high yield asset class is in the red by about 5 per cent, on track towards its first annual loss since 2008.