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.