High yield: Attractive income in a low rate
environment The case for high yield bonds and loans has become progressively stronger, due in part to the trend for high yield to keep pace with equity markets in low growth environments, and its potential for outperformance in times of negative growth. This is especially attractive in the context of today's "low for long" interest rates.
Additionally, current high yield spreads to Treasuries of nearly 670 basis points are wide when compared to the 25-year average of 588 basis points. Meanwhile, default rates are near historic lows: 1.95% versus the 25-year average of 9.1%. Yet, markets are pricing in five-year default rates that appear high relative to the current environment.8
High yield valuations appear attractive. While spreads are wide compared to historical averages—implying that the market expects high default rates—current default rates continue to remain at historic lows.
High yield markets are pricing in unprecedented levels of defaults
Source: J.P. Morgan Securities LLC, Bloomberg. As of February 2012.
Past performance is not indicative of future results.
At 669 basis points, high yield spreads remain wide relative to defaults, currently at 1.95%
Source: J.P. Morgan Securities LLC. As of July 18, 2012.
Past performance is not indicative of future results.
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8 Source Bloomberg.
High yield bonds are speculative, non-investment grade bonds that have higher risks of default or are subject to other adverse credit events, making them appropriate for high-risk investors only.
The views and strategies described herein may not be suitable for all investors. This information is not intended as an offer or solicitation for the purchase or sale of any financial instrument.