Not the Usual Suspects

Is there no place to find yield today?

Not the Usual Suspects

Investors are now seeking yield beyond high quality credit and advanced economy bonds. High yield credit and emerging market debt are two options offering yields in the range of 4-6%, near historical medians.

Compared to the yields on investment grade corporate bonds, high yield bonds fare well. US corporate high yield has a yield-to-maturity near 7% with a rather short duration of 4%. With a similar short duration, Pan-European high yield has a yield-to-maturity at 4%.

Emerging market (EM) debt offers an alternative to low yield advanced economy debt. EM hard currency sovereign debt has a yield of 4.7% with duration of 7.4%.

Both US corporate high yield and EM hard currency sovereign fare well when looking at yield and duration in the time perspective. Both have durations in line with their medians, and so might be better positioned in the case of interest rate increases.

Although both high yield credit and emerging market debt have relatively attractive yields, emerging market debt has a better rating quality balance. Whereas US corporate high yield is made up of non-investment grade bonds, over half of EM sovereign debt has an investment grade rating. Furthermore, EM sovereign debt has a better liquidity cost score than US high yield.