How to squeeze highest returns from high yield

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Valuation and liquidity risks in European high yield debt will prevent a repeat of last year's booming returns unless investors adapt, warns Fraser Lundie, co-head of credit at Hermes Fund Managers.

Investors have every right to be cautious on high yield bonds. Now trading at a 16-year peak, there does not seem to be much room to rally further. Global bond prices have surged to 105.8, the highest since 1997, as yields have fallen to 5.2%, the lowest since the same year. Last year’s double-digit returns, driven by investors’ appetite for yield and central bank stimulus, seem unlikely to repeat in 2013. The strategies which have worked in the past will not help now. But careful issuer and security selection in Europe and overseas can deliver strong, risk-adjusted returns for long-o...