Buying High Yield at the peak of the financial crisis at the end of 2008 would have been a very lucrative investment.

High Yield spreads over US Treasuries have narrowed from a peak 20% to a low of 2.2% in 2014 to 3.5%, where they are now.

Source: Bloomberg

 

With the benefit of hindsight, we all know that QE has been the key driver for all ‘risk’ assets including High Yield and in the chart below we can see the strong risk/reward characteristics of that asset class, relative to equities and government bonds.

 

Source: FE Analytics

 

During the temper tantrum in late 2014, spreads spiked higher on the back of decreasing support from the Fed in the form of reduced QE, only to fall back and settle within a 3.0-3.5% range until Q4 of last year when the market reacted badly to persistent Fed tightening. However, an about turn by the Fed has seen spreads settle back towards 3% once more.

Therefore, within our Funds we have sold out of High Yield and recycled the proceeds into a combination of US Treasuries and global equities, as we would rather have the credit risk in the stock market, with greater symmetry of risk, than in the bond market.

The following chart plots the risk/reward of High Yield versus a 50/50 portfolio of US 10yr Treasuries and the MSCI World Index over 5 years, stripping out the extremes of the financial crisis. What this demonstrates is that the 50/50 portfolio has produced, and we expect to continue producing, better risk adjusted returns.

 

Source: FE Analytics

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MitonOptimal UK Limited is part of the MitonOptimal group of companies. Registered in England and Wales No. 09138865. Authorised and regulated by the Financial Conduct Authority.