Global investors have resumed their selling of high-yield corporate bonds after a brief respite in January, as fears over the health of smaller banks add to risk aversion driven by worries over rising interest rates, recession and defaults.Silicon Valley BankFund managers advise shunning high-yield bonds, despite their attractive yields, because of the risk these bonds could be hit by ratings downgrades, defaults and a squeeze in company earnings.
The demand for high-yield bonds has faltered since February due to a rise in U.S. Treasury yields, as strong economic activity bolstered expectations that inflation would remain sticky and the Federal Reserve would have to raise interest rates more to contain it. The yield spread between the BofA high-yield bond index and the U.S. 10-year Treasury bond has risen to more than 500 basis points for the first time since October.
“Once we can be sure that the Fed has reached or is close to reaching the terminal rate, with the potential for a soft to softish landing, investors at that point could begin to increase exposure to high yield.”