Certainly, any rate rises have so far been well signaled and many are predicting the Fed is preparing to hike again at its meeting later this month (June).
“Regardless, high yield carries significantly less interest rate or duration risk than many other fixed income markets,” Mr Horne notes.
“And while we would advocate portfolios not being too centered in long maturity bonds, particularly in the context of Europe where the curve looks the flattest, we think the overall disruptive effect of the curve will be relatively short-lived and may offer a significant investment opportunity amid a strong corporate earnings backdrop.”
Ultimately, investors need to have a good understanding of their own risk and reward limitations before deciding where to sit on the yield curve.
Lombard Odier’s chief investment strategist Salman Ahmed claims with yields so low, it is risky to search for yield by extending duration still further.
He adds with yield curves as flat as they are, the compensation for doing so is meagre, “meaning the correlation between interest rate risk and yield has broken down to the disadvantage of investors”.
“In our view the true ‘sweet spot’, especially for more conservative investors, is in ‘crossover credit’ – corporate bonds rated at the lower end of investment-grade (BBB) and the higher end of high-yield (BB),” Mr Ahmed explains.
“Lower-rated bonds offer higher yields and a better balance between duration and credit risk than investment-grade bonds.”
eleanor.duncan@ft.com
