Chance for preferreds and EM debt to shine?

The prevalence of an enormous pile of negative-yielding bonds—bonds that cause bondholders to lose money if held to maturity—is causing a lot of headaches for investors, particularly those who are income-focused. The market value of the Bloomberg Barclays Global Negative Yielding Debt Index has been hovering above $17tn lately, which equates to close to a fifth of the value of global investment-grade issues.

 

That backdrop coupled with a brighter economic outlook and expected price pressures is likely to drive a “yield-frenzy” this year. The question is, where can investors look for yield? As shown in the graph below, the answer lies in the preferreds, emerging market debt and junk corporate bonds. However, these types of assets are risky, so whoever takes them on should have a stomach for volatility and potential defaults. Their supply is also constrained when compared to investment-grade debt.

Alternatives for yield chasers (%)

Source: Factsheets @ 31 December 2020. US HY: Bloomberg US Corporate High Yield; Global REITs: FTSE NAREIT Global REITs; Emerging market debt($): J.P. Morgan EMBIG Diversified; Emerging market equity: MSCI Emerging Markets Index;  Developed markets equity: MSCI World Index; U.S. Equity: S&P 500; Global growth: MSCI World Growth Index; U.S value: MSCI World Value Index.