Dennehy Weller managing director Brian Dennehy has warned investors to steer clear of strategic bond funds with large high-yield bond exposure.
He says the “deflationary mix” in the markets has benefited high-quality bonds while the significant slowdown in economic growth globally does not suit high-yield bonds.
He says many strategic bond fund managers have invested heavily in high-yield bond funds in the past few months and warns it could “get ugly” if there is a banking crisis.
Dennehy cites high-yielding funds such as the SJP corporate bond, which yields 8.8 per cent, the Invesco Perpetual monthly income plus, which yields 7.47 per cent, and the Artemis high-income fund, which yields 6.99 per cent, as examples.
He says: “These funds were down by 8.51 per cent, 7.33 per cent and 5.52 per cent respectively in the last three months.”
M&G said recently that the record numbers of redemptions from high-yield bonds in recent weeks is similar to that of 2009, when opportunities started to appear.
But Dennehy says: “As highyield bonds tend to be highly correlated with the stockmarket and the health of the economy generally, it is very difficult to justify buying high-yield funds now.
“If the stockmarket is heading somewhat lower, then you must assume the same for highyield bonds.”
Kames Capital high-yield bond fund manager Philip Milburn (pictured) says the market needs to drop by around 10 per cent before the high-yield bond market looks “exceptionally attractive”.
Milburn, whose fund is still defensively positioned in the short term, says: “Historically, when high-yield spreads have been at 1,100 basis points, it is a great buying opportunity and they usually come off that mark pretty quickly.”