‘Fallen angels’ are posing the biggest threat to the bond market this year

‘Fallen angels’ are posing the biggest threat to the bond market this year

The riskiest part of the corporate bond market is off to a strong start in 2019. Investors, however, might not want to get too comfortable.

iShares iBoxx $ High Yield Corporate Bond exchange-traded fund, has been one of the leaders in attracting investor cash, pulling in $1.18 billion in inflows this year.

This year’s rebound comes off a December when the high-yield market dried up. Low-rated companies stopped issuing debt amid a freeze in market activity and a big drop in the stock market that reflected a general risk-off attitude.

Bond market pros are warning, though, that the more constructive atmosphere looks to be temporary and that worries over corporate debt will last through the year.

“History indicates that high yield typically bounces back from negative return years, so we can understand why many strategists are increasing their 2019 forecasts,” Michael Anderson, head of U.S. credit strategies at Citigroup, said in a research note for clients. “In our view, December’s swoon is indicative of an increasingly fragile market. For most of 2018, investors wondered what could derail high yield. Now we see how quickly things can turn.”

Anderson forecasts a middling year for the sector, with expected returns of 2.9 percent.

However, he notes that the possibilities run to the extremes. History since 1990 suggests that when high yield has a bad year, the next year sees a sharp rebound, with an average return of a whopping 29.16 percent.

“The most likely outcome for high yield in 2019 is either a big rebound (with returns in the low teens) or further weakness and another negative year (or close to a negative year),” he wrote.

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