May 2013_issue_24
The chart above highlights the folly of confusing headline credit spread for actual returns. It shows the actual positions of an index of European high yield bonds, plotted by spreads in basis points (bps) on the horizontal axis and total returns over the next three years on the vertical axis. So, to take the two most extreme examples, had an investor purchased the market at a spread of 1200bps, their total return over the next three years was around 65%. Had they purchased the market at just under 200bps their return was almost -10%. Now that high yield spreads are about 400bps, it can be argued that buying an entire high yield index is little more than a 50/50 punt and not an appropriate strategy for an institutional investor. It is arguably better to look at investment grade corporate bonds, whose headline spread plus price performance could offer significantly better returns over time than high yield.
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