AXA Investment Managers, the asset management subsidiary of AXA, entered 2013 with “reasonable rather than a cheap valuation for high yields,” according to James Gledhill, global head of high yield at AXA Investment Managers and fund manager of the AXA Global High Income Fund.

Gledhill said that on an absolute basis "yields are now low in historic terms". However on a relative basis versus government bonds, spreads remain quite wide and defaults are far below average. The firm’s view is that investors are being well paid for taking credit risk and it is comfortable that default rates will not increase in the near-term.

US and Europe

“When looking at allocations to the US and Europe there are many things to bear in mind, including valuations, liquidity and the macro environment/headline risk, which has become a much more important consideration than it was in the years before the financial crisis. There is now more tail risk and as such, the macro needs to be taken into account when picking bonds, along with the micro credit risk analysis,” said Gledhill.

Macro approach

In terms of the macro, AXA IM says that the US is in much better but not brilliant shape compared to Europe and there are signs that the US is returning to growth, however the average credit quality of the market in Europe is better than in the US.

“Although the two markets optically yield about the same, when you adjust for the credit quality difference, European yields are around 80bps higher than in the US which seems fair,” said Gledhill.

The AXA Global High Income Fund, which is diversified across the global high yield universe, is overweight short duration credit compared to the market.

“We believe that global high yield spreads remain attractive versus government bonds and that spreads provide an attractive compensation for default risk, versus underlying government bond returns,” said Gledhill.