Despite reported warnings around a "collapse of the high-yield debt market", Coutts continues to hold high-yield debt in portfolios and doesn’t anticipate a sell-off in these markets in general, the Swiss private bank has confirmed in its latest Wealth Watch.
Accoridng to Coutts, while there is an overheating in selected areas of Asian high yield, "particularly so-called "CoCos" (contingent convertibles)", the lender’s portfolios hold more "robust high-yield debt" where valuations are not stretched.
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Alan Higgins, chief investment officer, UK at Coutts, said, "Yields are historically low across bond markets in general – in government, investment-grade (higher quality) and high- yield (lower-quality) corporate bonds. As a result, there is little room for yields to go lower (prices to go higher), and therefore risks are skewed toward higher yields in general.
"Our main scenario is for modest positive returns from corporate and high-yield bonds this year. This view is based on the outlook for a continued, though sluggish, global recovery, and for interest rates to stay at their historic lows across the developed world for several more years."
The emerging market bonds offer potential value and also enhance returns in local-currency emerging-market debt, Coutts has mentione din the Wealth Watch.
We believe high-yield bonds, however, continue to "sufficiently compensate investors for the greater default risk taken on".
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By GlobalData"Default rates for high-yield are currently low by historical standards, while volatility in the sector is also at low levels. Higher-yielding bonds, as well as being in demand by yield-starved investors, are also less sensitive to changes in yields than their lower-yielding counterparts. This is a benefit in the current environment, where yields are more likely to rise than fall," added Higgins.
