Ultra-low interest rates globally have spurred investors to chase yield in ever riskier corners of the bond market, but some are starting to pull out of the race into high-yield papers.
"We take our exposure in high yield bonds to zero, and keep the proceeds in cash," Julius Baer, which has around $409 billion in total client assets, said in a note Wednesday. "Speculative-grade bonds have become expensive and are facing serious liquidity challenges."
Julius Baer isn't alone in heading for the sector's exits. Around $6.34 billion has flowed out of high-yield bond mutual funds and exchange-traded funds over the past four weeks, although a net $17.15 billion has flowed in so far this year, according to data from Jefferies.
High-yield bonds, otherwise known as speculative grade or junk debt, are issued by companies with a rating of 'BB' or lower from Standard & Poor's or 'Ba' or below from Moody's. They have a higher risk of default compared with investment-grade debt, but traditionally offered higher yields as compensation.
Julius Baer is concerned that as regulators "tighten the screw" on banks, it will limit their ability to provide liquidity in the high-yield bond market.
"Liquidity conditions could become as precarious as in late 2008," it said. "If investor sentiment worsens, their low liquidity means that we would not be able to get out in time."