Invesco Fears Junk Bond Missteps

Invesco Fears Junk Bond Missteps

almost 4 years ago2 mins

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Investment manager Invesco typically has a place in its heart (and its portfolio) for high-yield bonds. But amid worrying signs that investors are focusing too much on future sunlit uplands – and not enough on the economy crumbling beneath their feet – the firm’s now taking a different tack ⛵️

What does this mean?

In a report this week, Invesco drills into the latest data on economic activity around the globe, as well as the stringency of government responses to the coronavirus. The latter may seem incongruous – but analysts looking to get early insights into the shape of economic recovery are currently employing sources as novel as Apple andGoogle mobility data.

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When it comes to the US, Invesco thinks a combination of low stringency and large government stimulus ($3 trillion and counting) will lead to an 18% drop in second-quarter economic growth compared to 2019: bad, but likely to be much better than in, say, the UK. What worries the investment manager, however, is its belief that US industrial production could simultaneously shrink 20% in such a scenario – with dire consequences for high-yield bonds 😬

Companies selling these so-called “junk” bonds are by definition more likely to fail to pay investors either their promised regular interest or the full value of the underlying “loan”. But Invesco predicts, based on their link to industrial production figures, that up to 20% of American high-yield bonds could soon end up defaulting on repayments…

Peaks are unlikely to have passed
Peaks are unlikely to have passed

Why should I care?

Invesco, along with other big money managers, has previously been a fan of high-yield bonds, which normal investors can access via exchange-traded funds. With soaring demand for super-safe government bonds driving their prices up, the stronger relative returns offered by those risky junk bonds appeared attractive 👀

Now, however, Invesco thinks the risk is simply too great – and that investors are overlooking hard economic truths that will soon hit home in the form of bond defaults. As a result, it’s cut high-yield bonds completely from its model portfolio in favor of their safer “investment grade” cousins.

Invesco is also light on stocks – but loading up on real estate (see link above)
Invesco is also light on stocks – but loading up on real estate (see link above)

Finimizers looking for more details on the different classes of investment – and how they might fare in the current crisis – should head on over to our Corporate Bonds Pack.

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