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Short-duration demand distorts high-yield bond market 

November 11, 2016

Robert Smith, Reuters

The growing clamour for paper from short-duration high yield bond funds is allowing Europe's lowest rated companies to sell debt with increasingly aggressive call structures.

Investors who are nervous about the rates outlook, but happy to take on credit risk, have poured money into short-duration funds this year. While European high-yield funds monitored by JPMorgan saw a 138m outflow in the week ending November 2, short-duration funds saw an 81m net inflow.

"If it wasn't for the flows taken in short-duration funds, overall high-yield fund flows would be quite negative for the year," said one portfolio manager.

Junk-rated companies are exploiting this demand for short-dated paper, bringing deals that hand their owners greater optionality at the expense of investors' returns.

"There haven't been too many horrible credits coming through in the European primary market, but the way call structures are evolving is reducing the potential for capital appreciation," said Fraser Lundie, co-head of credit at Hermes Investment Management. Read more

 
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