As valuations remain attractive and fundamentals are still solid, the high yield corporate bond market should outperform other fixed income assets on a relative and absolute basis, says Baring Asset Management.

“The fundamentals of the asset class are still robust, with declining leverage rates, declining default rates, an increase in debt refinancing, and improving balance sheets across the board,” says Ece Ugurtas, manager of the Baring High Yield Fund.

”Additionally, from a pricing perspective, spreads remain attractive and we believe high yield investors are being well rewarded from a risk-return perspective.”

Declining default rates and all-time low debt levels, in terms of leverage, with over 80 per cent of high yield companies in deleveraging mode, have created attractive opportunities in high yield debt. This is further supported by capital market conditions, as 60 per cent of issuance in 2010 was used to refinance debt, and the trend continues this year with 70 per cent of high yield issuance being used to productively improve balance sheets.

Barings believes that high yield debt has particular merit in terms of relative value, especially given the low yielding government bond market. In the context of continued improvement in the global economy and monetary policy normalisation, Barings expects the high yield bond market to continue to outperform.

High yield bonds are highly correlated with macroeconomic conditions and credit quality of bank issues, rather than interest rates movements. Sustained economic growth should therefore benefit this asset class over the medium and long term, says Ugurtas.