Reflecting on the past year, 2017 was a year of low volatility across risk asset classes with both US and EUR High Yield posting high single digit total returns that were above most of the Street expectations.
Our forecasts for 2017 returns3 were closer to the actual returns than many of the Street forecasts. Default rates were low4 and, in contrast with the 2016 Energy sector issues, there were no major sector themes and worries. Overall 2017 was a year where ‘risk on’ dominated and higher beta industries and lower rated sectors outperformed.
What to expect in 2018
We expect two Fed hikes during 2018 and think that high yield as an asset class can perform well in an environment of gradually increasing rates, especially given its spread ‘cushion’. However, for those clients more concerned about interest rate risk, floating rate notes could offer an attractive level of income with almost no interest rate risk.
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