GLOBAL - High yield returns were mixed in July, according to Invesco's July European High Yield report by Adam Cordery, head of European high yield.
European high yield returned –1.8% in July, while US high yield returned +1.6%. Both US and European high yield under-performed against government bond markets, which rose 2-3%, but did well against equities, which fell by 1-14%.
Yields, and default rates, are high, and investors need to be selective. The yields quoted on high yield bonds are high relative to historic averages. However bonds with a high yield are not necessarily cheap, they may just be about to default. High yield investors therefore need to discriminate carefully when deciding which bonds in the indices they should buy, said Cordery.
Ratings agency Moody’s projects the default rate for all high yield bonds will peak at 10.1% in February 2002, and decline thereafter. If this happens the high yield market will be exposed to more bad news in the next six months, but could revive thereafter once the weakest companies have defaulted and disappeared or been restructured.
The main risk to high yield from interest rates is probably to the upside. Interest rates have been falling and could continue to fall if the weakness in the global economy continues. Invesco estimates that US interest rates would have to fall by at least 50bps to be as low in real terms as they were in the last recession of the early 1990s.
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