The global market for high-yield bonds should remain strong in 2018 with returns making this asset class attractive to investors.
An outlook from global money manager Schroders calls for returns in the mid-single-digit range for 2018, which primarily reflects coupon income. The fundamentals of credit have improved over the past year while most global economies have strengthened, the firm says.
Defaults to be near record low
Default risk for corporate debt is low and is set to be close to historic lows in 2018 with a forecast of 1.7-2% and Schroders believes that the spike in defaults among the energy and metals & mining sectors which began in 2015/16 has run its course.
Higher expectation of defaults is already being priced-in for the retail and media sectors in the coming year.
Supply expected to be tight
The supply of high-yield bonds is expected to be tight in 2018 with a net decrease in US supply and only a small net increase globally.
There should be more supply in 2018 than in 2017 but demand will also be high.
Schroders also expects the value of high-yields to remain attractive to investors. Although there was not the expected correction in 2017 following a near-2-year rally, high-yields still look good compared to asset classes including government bonds and investment grade credit.
Overall the high-yield outlook appears positive but there are risks including monetary policy tightening by the Fed or ECB, and any global economic slowdown.
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