In the US, as in the UK and other developed economies, monetary spreads are narrower and the currency weaker, which are acting as further dampener effects on bond yields. Many corporate bonds are reflecting the yield compression on sovereign bonds, causing investors to question how far up the curve they should go to get yield.
“Yield is getting harder and harder to come by,” says Darius McDermott, managing director of Chelsea Financial Services. For him, yield can be found outside of traditional government or investment-grade bonds.
He comments: “There are some pockets of value left in selected high yield bonds – particularly in financial subordinated debt.”
This poses a question for Mr Iggo, who says the challenge for bond investors at the moment is how much risk to take to get as high a yield as possible.
“It is frustrating to end investors that income yields are so low across asset classes, but the reality is yields are so low and income return is more difficult to get, which tends to lead to the paradox of higher savings rates. To get the same income, you need to save more when yields fall.”
Popularity of high risk?
So higher risk strategies might become more popular, as these come with a commensurately higher level of return as compensation for the risk attached. But as Mr Iggo points out: “Some strategies try to boost the income they deliver to investors by taking on more risk, or by leverage.
"That can work but the risk to capital is higher.”
He explains: “It is possible to get north of 10 per cent yield in the bond market – the CCC-rated bucket of the European high yield market currently has a market-cap-weighted yield to worst of 11.1 per cent; the equivalent in the US has a yield to worst of 9.8 per cent.
“But with that comes a historical default rate, which has typically been around 25 per cent a year.” He asks whether investors can really risk a one-in-four chance their money will be lost through defaults?
Therefore, taking more risk to get more yield is not always going to be the best way to find income in 2017 from the bond markets.
Looking around
For Chris Leyland, deputy chief investment officer for Newcastle-headquartered True Potential, finding yield is also about looking for alternative ways of finding income.
He comments: “Our investment management partners have a broad skill set and global reach, which means they can access non-traditional income drivers, such as convertibles and preferred stocks.
“They can also dive into areas such as emerging market debt, and energy and infrastructure bonds.”
