High Yield Overhyped, Researchers Warn

A new analysis of Internet searches, ETF fund flows, and closed-ended fund premiums has led analysts to believe that high-yield bonds are ready for a correction.

City of London, UK Bigstock

City of London, UK Bigstock

High-yield bonds are a risk asset likely heading for a correction, according to analysts at Fidante Capital, who measured investor hype for a report published Monday.

They compiled the new Hype Index using inputs from Google searches, ETF fund flows, and closed-ended fund premiums, and measured the output alongside market price momentum.

“Prices are not following through on investor interest and investor flows,” Joachim Klement, head of investment research at Fidante Capital, told Institutional Investor in an interview.

“People are still interested in high-yield investment, and are putting money to work in high-yield bonds, but, at the same time, we see price momentum starting to wane. Prices are still going up, but the rate of return is coming down precipitously,” he added.

Klement’s analysis of high-yield hype comes as asset managers have become increasing cautious about the prospects for these bonds in recent weeks. Janus Henderson’s Bill Gross, who pioneered the active management of bonds as a co-founder of Pacific Investment Management Company, warned last week that bonds have entered bear market territory.


[II Deep Dive: Bill Gross Sees Bonds Like Men in a Bear Market]

In an investor update, Eugene Philalithis, a portfolio manager at Fidelity International, said he had questions over how long the sector’s run would continue.

“High-yield bonds delivered strong total returns over 2017, as spreads continued to compress,” he said. “There is a limit to how much further this can go on for, however, with spreads now at or close to all-time lows.” Philalithis’s caution was echoed by Marc Kemp, an institutional portfolio manager at BlueBay Asset Management, although Kemp said he could not see signs of a correction at present.

“High-yield bonds are not a beta trade anymore and very much about security selection going forward,” he said.

Risk assets have been under increasingly scrutiny in recent weeks, with investors debating at what speed central banks will begin policy tightening in 2018.

At the beginning of January, a survey of investors by Managing Partners Group found that 71 percent of investors anticipated a correction in global equities in the coming 18 months.