3 Strikes: High Yield Corporate Bonds
In 2020 there was a historic amount of corporate debt downgraded because of the pandemic and increased amount of issuance. Today we see 3 reasons to be cautious of high yield corporate bonds: Strike 1 – Investor protection has collapsed since 2014 and today over 85% of bonds are “covenant lite”. Strike 2 – There are huge amounts of BBB rated investment grade bonds on watch to be downgraded. Strike 3 – High yield bond yields are the lowest in their history (3.24% on BB rated bonds). We reduced our credit exposure in January and are short-term in our corporate bond exposure.