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January 11, 2014

Corporate credit spreads at 6 year lows

The performance of the corporate credit market in the last 6 years has been remarkable and we are now seeing the lowest spread levels for investment-grade and high-yield bonds since the onset of the 2008 recession. While avoiding equities, yield-hungry investors have plowed money into various fixed income markets. High Yield as one of the key beneficiaries of this demand has just recorded a record low spread of 3.80% on December 5th 2013. We have not yet seen the much discussed „great rotation“ from bonds to equities but we have certainly witnessed the rotation within fixed income, i.e. the rotation from government bonds into credit.

Corporate Credit

JP Morgan estimates that European High Yield bonds will only deliver a total return of 3.4% in 2014 and investment-grade bonds only 0.9%. In our view, the current spread levels are not very attractive. They leave investors with too thin of a cushion against losses should benchmark interest rates climb.

If you have questions about High Yield bonds and what role credit should play in your portfolio going forward, please do not hesitate to contact us on info@ipanema-capital.com.

The author worked for more than 6 years on the high yield desk of a major investment bank in London, covering some of the largest institutional asset managers in Europe.

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