It's time to be cautious about US high-yield bonds
There's limited upside potential from both income and price, and credit risks could be under-priced. Risk-reward is increasingly skewed to downside
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US high yield, on aggregate, is one of the top-performing fixed income segments in the year to date. In a year of idiosyncratic credit risk re-emerging and treasury yields rising, US high-yield bonds have managed to generate positive returns, even as many other segments failed to do so.
Bolstered by a robust US economic recovery, easy monetary conditions and renewed risk appetite, investors were emboldened to venture beyond traditional safe-haven bonds and into US speculative-grade bonds.
A backdrop of steadily fading credit risks for the asset class has supported this. Over the past three quarters, the default rates for US high-yield bonds have sunk, particularly for riskier sectors, and more issuers have received credit rating upgrades.
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