Income investors should “think horizontally” to capture attractive yields, says AllianceBernstein

Retirees and other income investors looking for attractive yields may have more opportunities at their disposal than they realise as a result of changes taking place in the world’s high-yield bond markets, global asset manager AllianceBernstein said today.

“As the need for income grows among ageing investor demographics in Australia and elsewhere, high-yield bond markets are developing in ways that could help meet that need,” said Jeremy Cunningham, a London-based Senior Portfolio Manager within AllianceBernstein’s global fixed-income business.

“But to take advantage of these new opportunities and guard against the risks, investors need to break out of old ways of thinking about high-yield markets.”

The opportunities are the result of both evolution and disruption, as high-yield markets are growing and becoming more global in nature while tighter regulatory controls are sidelining the role of banks as lenders to high-yield corporate borrowers, thereby creating opportunities for non-bank lenders.

“The high-yield market has grown from US$100 billion in 1990, when it was really just a US market, to a global market of around US$2 trillion today. Most of that growth has been driven by the US high-yield bond and leveraged loan markets, but emerging-market and European high-yield markets have contributed too.

“As a result, it no longer makes sense to talk about high-yield as just one asset class. Investors can capture high-yield risk and return at various points along the sub-investment-grade credit-rating spectrum in the US, emerging-market and European bond markets.”

Growth in the high-yield markets is expected to continue, particularly in Europe. Bond markets there are far less developed than their counterparts in the US, because of European banks’ traditional dominance of the corporate debt markets. This dominance is under pressure, however.

“The role of banks has been changing since the global financial crisis, partly because of tighter regulatory requirements but also because banks want to take less risk. Consequently, they are lending less to the riskier corporate borrowers who comprise the high-yield debt market,” said Cunningham.

“This creates opportunities for non-bank lenders such as bond managers, especially those that have the research capabilities and credit skills necessary to price the risk accurately.” The bank activities affected by the trend lie in such areas as mortgage lending and servicing, middle-market cash flow lending, other commercial finance or leasing, equity and mezzanine debt investing and infrastructure.

“To really understand the risks and potential benefits of these changes we believe investors should start thinking horizontally,” said Cunningham. “That is, rather than taking a top-down view of markets in terms of geographies and indices, look instead at the risk and return spectrum across all high-yield markets.”