It has since drifted upwards, but not much. In round numbers, European junk bonds (to give high yield one of its previous names) are now yielding the same as the US 10 year Treasury.
When we ask ourselves the theoretical question ‘which of these is going to perform worse in slowing growth?’, the answer is not hard to see.
The same arguments hold true, albeit to a lesser degree, with both the US and UK high yield markets. Yields are too low in both absolute and relative terms to withstand a slowing of – or even an expectation of slowing – economic growth.
Across the board, high yield bonds are vulnerable to the double whammy of a rise in absolute yields and a widening of spreads.
Should markets start to lose confidence in robust economic growth, high yield is right in the crosshairs. It now represents a significantly lower part of our weightings than at the start of the year.
Jim Wood-Smith is chief investment officer, private clients, at Hawskmoor
