Email of the day
Comment of the Day

November 20 2012

Commentary by David Fuller

Email of the day

On high-yield bond funds:
"Please could you comment on the Lex article in the FT today on a possible flight from high yield instruments."

David Fuller's view Yes, and thanks for drawing the Lex item to my attention; here is the opening paragraph:

The financial market's sirens have been singing about yield. In a world of zero interest rates engineered by central bankers, it was inevitable that many investors would listen. But following the music has suddenly brought them perilously close to the rocks.

It is worth reading the rest of this short item from Lex and you can always monitor the funds mentioned in the Chart Library. Although still near the higher side of their broad ranges, they have generally underperformed as you can see from these weekly charts for the iShares iBoxx High-Yield fund and also the Pimco High-Income fund (note: extreme tails in two instances on each chart suggest errors in Bloomberg's data).

I admit to being off-piste in assessing these instruments but I have a general view and it concerns me. While Fullermoney prefers sound corporate bonds to western government and JGB debt, that is hardly a recommendation. The 70 percent premium mentioned by the FT for the Pimco bond is unsustainable and indicates bubble conditions, living on borrowed time.

Additional feedback from subscribers experienced in these markets would be welcome.

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