Given that high-yield bonds equities are both risk assets, the balance is currently tilted in favor of junk debt, in the eyes of Northern Trust’s Katie Nixon. Both will likely post high single-digit gains, but investors are able to clip coupons on bonds in addition to that return, she said.
“Adjusting that 8 to 9% yield for risk, it does look pretty attractive relative to the much higher-risk return on an equity,” Nixon, chief investment officer at Northern Trust, said via phone. “You’re at least getting a yield, and that gives you the luxury to stay the course. And right now, that yield component is pretty high.”
That view rests on the belief that high-yield spreads to Treasuries will remain contained and corporate defaults will stay low, Nixon said. The Fed’s pandemic-era credit backstop and near-zero interest rates have kept the default rate ultra-low over the past two years, though Deutsche Bank and others have warned that dynamic may shift should growth contract.
The wild card for every asset class is the Fed. The central bank delivered a 75-basis-point hike last week, with traders pricing in nearly 200 basis points of additional tightening through year-end. It remains to be seen if that will be enough to tame inflation, which erodes the returns on fixed-income securities.
“If you think equities might do mid-single digit to low-double digits over the next 12-18 months, that makes high-yield bonds look pretty competitive assuming we don’t have a big jump in defaults,” Margie Patel, Allspring Global Investments senior portfolio manager, said in a Bloomberg Television interview. “It doesn’t look like we will, but we haven’t seen the Fed complete their tightening so it’s not really clear.”
--With assistance from Lisa Abramowicz.
This article was provided by Bloomberg News.