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HY bonds: time to buy

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HY bonds represent good value relative to leveraged loans

A lot has been made in the past week of the problems facing leveraged loans.

The thrust of the argument is that, despite their floating rate coupons protecting investors from central bank rate rises, this will do little to compensate for the higher than expected default rate.

Leveraged loans have also not sold off very much, partly because higher interest rates have meant better cash flows in the short term.

Surely, then, this must mean it is time to buy high yield bonds, which have sold off plenty since the start of the year.

The Non-Financial Developed Markets High Yield Constrained Index (H4NC) was down at 87.9 last week from 103 at the start of the year, according to a Muzinich note.

Yields and spreads have also risen in this time, and compared with leveraged loans the universe of high yield bonds is better rated, has lower average leverage and offers greater creditor protections.

Increasing your position in high yield now, while others are still selling, would make a lot of sense. At least more sense than buying leveraged loans.

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