Are Junk Bonds The New Haven Assets For Investment?

The riskiest of all fixed income assets – junk bonds are becoming the new safe haven asset for investment. This shift is because, globally, government securities are yielding next to nothing, allowing money to pour into the speculative grade debt.

Until now, this year, around $9 billion has been put into junk debt ETFs globally- a market that stands at $44.4 billion. Even the most conservative firms like Assicurazioni Generali SpA and Zurich Insurance Group AG, along with Swiss and Italian insurers have decided to invest in sub investment grade debt. According to Jeffrey Gundlach, the bond markets’ brightest name, you can only make money on German bonds by betting against them, so it’s much better to invest in junk bonds.

Investors have more reason to park their investment in high yield assets after the sudden selloff in euro sovereign debt, but that comes with a fair amount of exposure to losses. Most investors have few other options with the European Central Bank making bond purchases, keeping government yields closer to the low side.

Data compiled by Bloomberg showed that around $2.36 trillion of government bonds around the globe have negative yields. Central banks are resorting to cheap money policies to drive growth and prevent deflation, hurting and distorting the bond markets around the globe. The situation worsens for countries that trade in the euro. Europe’s largest economy, Germany has 40 percent of its securities with sub zero yields due to quantitative easing.

The EPFR Global began compiling data on the junk bond ETFs market in 2007, which is also the only comparable measure against which the money poured into junk bond ETFs in the first four months of the year alone, has been the highest. The worst sell off since 1993 was the wakeup call for investors, with 143 billion Euros of government debt in the euro area wiped off.

Junk bonds, compared to government debt this year, seem to outperform them with 4.4 percent returns as opposed to 2014 when they underperformed the worse since the financial crisis. Junk bond yields are on the rise since last year, becoming increasingly attractive. On average, the speculative grade securities yielded 6.37 percent against 0.99 percent yield for sovereign bonds. In today’s low return environment, high yield bonds are one of the best strategies to generate total return.