Baring Asset Management sees BBB and BB rated corporates as offering the best risk and reward trade ...
Baring Asset Management sees BBB and BB rated corporates as offering the best risk and reward trade off to fixed interest investors.
The group's credit analyst, Nigel Sillis, said investors should focus on the bottom end of investment grade and top end of non-investment grade products. Default risk within investment grade credits runs at around 1%pa, rising rapidly into the mid-teens outside of this. Sillis estimated a default probability of 16% for European high yield bonds yielding 10% and above.
He added that those who wanted an income in excess of 10% were going to find it very hard to do so without significant levels of capital risk.
He pointed out that, in 2001, out of all European bonds with a yield above 10%, some 70% produced negative returns, compared to 45% for those with a sub-10% income.
Sillis added: '2001 was an exceptional year, with defaults rising in falling economic conditions. The total market return was -14.75%, despite these bonds promising an income 10% plus.
'Among the European bonds last year yielding 10% or above were Slovak Wireless 2007, Sola International 2008 and Dana Corp 2011. Some 70% of high yield is worse than this.'
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