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Why high yield debt faces a sharp summer correction
Markets
by Emma Dunkley on Jul 04, 2011 at 10:20
A sharp correction in high yield debt markets is set to occur this summer and could spur yields upwards by as much as 100 basis points (bps), a number of investors are warning.
Over the six weeks to June 20, the yield on the Global High Yield index has risen by 80bps, showing a meaningful correction in this segment of the debt market is already under way.
Ben Packenham, manager of the Henderson Extra Monthly Income Bond fund , said the last few weeks have seen the first significant sell-off in high yield debt this year.
‘There has been a correction already,’ he said. ‘High yield is down about 1% over the month to date, which is a big move by high yield standards, although we are not at the bottom yet.
‘I expect the correction to continue as there are some issues still, such as the situation surrounding Greece. The market is still panicking that it could be pushed into default. This could otherwise be the usual mid-cycle correction, but the Greek and peripheral Europe situation is having an impact.’
Packenham said he has taken some risk off the table and moved into cash as a result, holding as much as 5% on deposit recently, up from a low of 1% six weeks ago. He has also sold out of peripheral Europe high yield debt, halving his exposure to Spanish and Italian corporate debt from 2% to 1% over the past few weeks.
However, he warned: ‘Could prices fall further? Yes. We need to get through the peripheral European wobble. Now is not the time to be buying into high yield, so keep your gunpowder at the ready in case of a further correction.’
Deterioration in quality
As well as this, the quality of high yield issuance is also concerning some managers. Peter Harvey, manager of the Cazenove Strategic Bond fund , said the quality of the paper since March has deteriorated significantly.
‘Consumer-facing companies – whether retail or suppliers to retail – are examples of some surprisingly disappointing issues that have come to market, in terms of quality. We have avoided most high yield since March because of this,’ he said.
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