Spotting value traps in European high yield

Even though high yield spreads appear relatively tight, valuations remain compelling when accounting for its short duration, high credit quality and low cash price. However, pockets of risk are arguably flattering the market’s overall valuation.

What does this mean for fixed income investors?

We still like high yield in the context of the overall fixed income markets, with technicals providing a very strong support for performance. However, as bottom-up fundamental credit investors, we believe that such markets can drive indexed investors into value traps, such as the European high yield real estate sector. We prefer to bear in mind that yields and spreads are ultimately subjective measures as they assume an uninterrupted stream of coupons, with full repayment of principal. Some of today’s cheapest securities, particularly in real estate, are unlikely to fulfil this obligation to creditors. 

About the Bond Bulletin

Each week J.P. Morgan Asset Management's Global Fixed Income, Currency and Commodities group reviews key issues for bond investors through the lens of its common Fundamental, Quantitative Valuation and Technical (FQT) research framework.

Our common research language based on Fundamental, Quantitative Valuation and Technical analysis provides a framework for comparing research across fixed income sectors and allows for the global integration of investment ideas.


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