Martin, speaking at the FSA Income Forum in Hong Kong last week, pointed to a mismatch between rating and duration. When agencies such as S&P, Moody’s and Fitch give credit ratings, they give it to the issuer not the individual bonds of the issuer.
“They rate the issuer and the rating will be the same regardless of the maturity or duration of the bond that’s actually in issue. If a company has a bond that has five years to maturity or six months to maturity, it will get the same credit rating.
“To us that seems a bit strange. There is a much higher degree of certainty six months or one year out than five years out for a high yield company.”
For the firm’s BNY Mellon Global Short-Dated High Yield Bond Fund, the investment team’s strategy is to look for such mispricing in the asset class. The result is a portfolio that tends to have bonds with a low credit rating or a B rating, but with an expected maturity of around 1.5 years.
“Through our bottom-up credit work, we can be more certain about credit risk of that company over a very short window. You can have a much better idea of the cash position, the ability to refinance that bond that’s coming due in 6 months or one year [than with a longer duration].”
He added that the yield curve is relatively flat with high yield bonds. With investment grade, in order to get more yield, duration has to be increased. “With high yield you don’t have to give up too much yield to reduce duration.”
In the short-dated high yield market, the investment team believes there is an attractive play between yield and duration.
“We expect yield 1% lower than the global high yield market but with duration that’s half that of the global high yield market. It’s a nice trade off.”
Insight Investments looks for high yield bonds with about a 1.5 year duration.
But in high yield, there is a big mismatch between ratings and duration.
Source: Insight Investments
