HY bonds: Source of income or threat?


Detlef Glow, head of Research EMEA at Thomson Reuters Lipper analyses whether high yield bonds are a source of income or a threat to investors.

Observing recent market comments and research studies, I have come to realize that the liquidity of high-yield bonds is an important topic for market participants and observers. There has been a lot of research published on this topic over the last few months. Even though some of this research touches on the risk/reward profile of high-yield bonds for the market as a whole, the main topic is still the risk of a shortfall in the liquidity of high-yield bonds.

The majority of this research is based on numbers from the US exchange-traded fund (ETF) market. That seems to be reasonable, but some observers use the results to draw conclusions for Europe, even though the European ETF market is far smaller than the market in the US; high-yield ETFs are not as popular in Europe as they are in the US.

From a European perspective the liquidity issue does not seem to be an issue at all, since high-yield ETFs (including emerging-markets bond ETFs) in Europe held on September 30 only 14.3 billion euros in assets under management (3.4% of the overall assets of the European ETF industry). But, as mentioned in my previous Monday Morning Memo–The Liquidity Riddle, to look only at ETFs for such an analysis does not reach far enough.

Not only ETFs invest in high-yield bonds; there are also a number of types of actively managed funds, varying from specialized bond funds to multi-asset funds, that invest in high-yield bonds. In this regard, any kind of turmoil in the high-yield bond segment might lead to high losses for a number of different product types, and a fire sale from investors in these products might make such a situation even worse.