Time to be cautious on high-yield bonds, CI manager says

Geof Marshall expects credit spreads to widen and is positioning his Signature high-yield bond fund accordingly.

Michael Ryval 21 June, 2018 | 5:00PM
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High-yield bonds have been under pressure from rising bond yields, and for the year to date the total return of the benchmark Bank of America Merrill Lynch U.S. High Yield Index is flat. Meanwhile spreads between high-yield bonds and comparable U.S. Treasuries, which indicate whether the asset class is attractive or not, have narrowed to about 360 basis points (bps) from 373 bps last December. In contrast, the all-time low was about 250 bps in 2007.

The spread could tighten even further, argues Geof Marshall, senior vice-president at Signature Global Asset Management, a unit of Toronto-based CI Investments. Marshall oversees about $16 billion in assets split roughly equally between high-yield bonds and investment-grade bonds. "It [the spread] is on the expensive side of historical averages. But there is a little room for more compression, maybe 20 or 30 bps in the next 12 months."

A 22-year industry veteran who joined the Signature unit in 2006, Marshall argues that economies are late in the cycle. "Equities need earnings growth to work and credit [high-yield bonds] needs earnings stability and balance-sheet discipline to work. But credit is possibly a little ahead of the business cycle, although it's hard to say how far ahead."

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Michael Ryval

Michael Ryval  Michael Ryval, a regular contributor to Morningstar, is a Toronto-based freelance writer who specializes in business and investing.

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