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Jupiter says high-yield bond market is peaking

Jupiter corporate bond fund manager John Hamilton thinks the high-yield bond market is peaking.

Following last week’s sell-off of high-yield bond markets in response to a profit-warning by General Motors, Hamilton thinks the spread between high-yield bonds and government bonds is still too narrow and prices are set to fall further.

He says prices for corporate bonds, especially at the bottom end of the junk market, have gone up so far that the effective yield no longer adequately compensates for the additional risk of investing. The spread on junk bonds has widened from 4.2 per cent on February 16 to 5 per cent on March 21 but Hamilton believes the spread should be 10-15 per cent for high yield bonds to look fair value.

Hamilton says: “Demand for corporate bonds has increased significantly over the past couple of years but prices have gone up so far that the yield investors can earn at this end of the market is at an insufficient prem-ium to that being offered on gilts. This is not sustainable.”

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