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Fri12152017

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Is US High Yield a risky investment?

“What is the most hated investment class in the market? EM equity? Probably that has happened already. EM bonds? So has that. US high yield seems more at risk than emerging markets.” - Tanguy Le Saout, Head of European Fixed Income of Pioneer Investments.

What happened in the May 2013 sell off?  Here is a run-down of a few asset classes showing their flows since QE3 began: first the inflows, and then the outflows that followed the peak, when the Federal Reserve started talking openly about tapering:

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From the table above, we observed that in May 2013 sell off, most asset classes would experience some form of outflows, however, apparently there is not outflow from US High Yield Bonds!  Thus Tanguy Le Saout says, “If everything has to be paid back,(referring to the unwinding of flows from the QE era) the most exposed asset class may not be emerging market bonds, because that sell-off has already happened. It could be US high yield.”

No doubt Le Sauot’s comment is a fair statement, however, for the time being, US High Yield would remain a ‘safe haven’ because High Yield is less sensitive to interest hike and the existing company’s default rate is still relative low.  Nonetheless, US high yield is an asset class to be followed carefully as the negative factors such as those mentioned by Le Saout are mounting.

Reference:

Forbes, Chris Wright, 20131202, “Could US High Yield Be Riskier Than Emerging Market Bond?”