FAKE NEWS ALERT!

11/09/2017

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​The credit team in London give their view on yield differentials in high yield markets.


“Ten-year US government bonds offer similar yields as the Euro high yield bond market.”
 
This particular headline and accompanying chart (below) has received a huge amount of air-time in recent weeks.
 
Yield on 10-year US Treasury and European high yield bonds (%)
yields
Source: Bloomberg, Bank of America Merrill Lynch, 31 August 1999 to 31 August 2017.
Note: Index HE00 used for euro high-yield and yield expressed 'to worst”'call date.
 
The headline yields are indeed similar and the picture is being used as an example of how bizarre some parts of the bond market feel in the era of central bank asset purchase programmes. This feels a bit like 'fake news' to us, with one glaring flaw in the argument - the comparison ignores the impact of hedging costs, both interest rates and foreign exchange.
 
For a euro-based investor, the cost of hedging a US-dollar denominated asset back to euro is currently close to 2%, reducing the yield on a 10 year US government bond from around 2% to close to 0%. Conversely, a US-dollar investor would enjoy an increase of around 2% (primarily because of the base interest rate differential between the two markets) when investing in euro denominated assets and hedging back to US dollars, bringing the yield on the euro high yield market up from around 2.5% to around 4.5%.
 
While the yields available on euro high-yield bonds are certainly lower than they used to be, they are still higher than 10-year US government bonds… when compared correctly. Most of our investors invest in fixed income on a hedged basis, so it makes sense to compare yields on a hedged basis.
 
Comparing apples with apples
Looking at the headline statistics from the US and euro high yield bond markets shows a yield differential of more than 3%. However, for a euro-based investor, the cost of hedging reduces this pick-up by around 2% and the headlines also hide the fact that the euro market is generally shorter duration with a higher average credit rating and a central bank providing unprecedented levels of support to government and corporate bond investors.
table
Source: Bloomberg, Bank of America Merrill Lynch, 31 August 2017.
Note: Yield and credit spreads are expressed 'to worst' call date. Indices H0A0 and HE00 used.
 
In this instance looking at the headline yield tells only half the story. Investors need to look through the headlines, understand the details and make valid comparisons when assessing markets.

 


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Important information

Please read the following important information regarding funds related to this article.

Janus Henderson Horizon Euro High Yield Bond Fund

Specific risks

  • The Fund could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the Fund.
  • If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
  • The value of a bond or money market instrument may fall if the financial health of the issuer weakens, or the market believes it may weaken. This risk is greater the lower the credit quality of the bond.
  • If the Fund or a specific share class of the Fund seeks to reduce risks (such as exchange rate movements), the measures designed to do so may be ineffective, unavailable or detrimental.
  • When interest rates rise (or fall), the prices of different securities will be affected differently. In particular, bond values generally fall when interest rates rise. This risk is generally greater the longer the maturity of a bond investment.
  • Any security could become hard to value or to sell at a desired time and price, increasing the risk of investment losses.

Risk rating

Janus Henderson Horizon Global High Yield Bond Fund

Specific risks

  • The Fund could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the Fund.
  • The value of a bond or money market instrument may fall if the financial health of the issuer weakens, or the market believes it may weaken. This risk is greater the lower the credit quality of the bond.
  • If the Fund or a specific share class of the Fund seeks to reduce risks (such as exchange rate movements), the measures designed to do so may be ineffective, unavailable or detrimental.
  • When interest rates rise (or fall), the prices of different securities will be affected differently. In particular, bond values generally fall when interest rates rise. This risk is generally greater the longer the maturity of a bond investment.
  • Any security could become hard to value or to sell at a desired time and price, increasing the risk of investment losses.

Risk rating

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