High Yield: Mind the gap

Written by: Global Thought Leadership | September 08, 2017

Source: Bloomberg, as of 8/31/2017. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment. 

The Bottom Line

  • A hallmark of active management is the flexibility to opportunistically rotate between sectors and securities in response to shifts in market conditions.
  • Current pricing in the global High Yield (HY) market offers a great example of opportunities available to active managers free to make tactical changes to allocations.
  • Today, European HY bond yields are near record low levels—and notably lower than their peers in the U.S. and emerging markets (EM).
  • Consider the Bloomberg Barclays Pan-European High Yield Bond Index which yielded just 3.29% at the end of August.1
  • By comparison, the equivalent indices for the U.S. and emerging markets yielded 5.61% and 6%—a differential of 232 and 271 basis points, respectively.
  • That’s quite a gap, especially when you consider that U.S. and EM HY bond yields are themselves low by historical standards.
  • It’s certainly true that European economies are improving and default expectations are low for high yield bond issuers. But even so, active bond managers have to consider whether current pricing is appropriate relative to inherent risks—which in this case remains open to question.
  • Whether shifting assets to US and/or EM HY proves to be advantageous remains to be seen, but over time, those alert to pricing disparities and the opportunity to seek more compelling relative valuations have the potential to help cushion portfolios from potential downside in a way passive strategies cannot. 


1 Source for all data is Bloomberg.


IMPORTANT INFORMATION: All investments involve risk, including loss of principal. Past performance is no guarantee of future results. An investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls. International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice.  Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not  take into account the particular investment objectives, financial situation or needs of individual investors.

Yields and dividends represent past performance and there is no guarantee they will continue to be paid.

Active management does not ensure gains or protect against market declines.

High yield bonds are subject to increased risk of default and greater volatility due to the lower credit quality of the issues.