The new defensives: High yield and the dollar

As world markets tumble and the euro zone crisis seemingly reared its head once more, investors have scrambled to find somewhere safe to house their cash.

Equities on both sides of the Atlantic have been hammered as volatility has peaked to 2011 levels amid worries over global growth and the spread Ebola.

A flight to traditional safe haven U.S. Treasurys pushed yields down around 1.8 percent on Thursday, levels not seen since 2013 – making it an expensive option for investors as prices move inverse to yields.

"Sometimes, when markets fall, you get to a 'no-brainer' moment, when you can afford to ignore short-term concerns and take advantage of sudden decline in prices. This is not such a moment for equities," chief investment officer at Cazenove Capital Management, Richard Jeffrey said.

"Markets are not cheap, and could fall further. Indeed, although we might expect it to remain so, the U.S. market looks quite expensive," he said.

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Traders work in the S&P 500 options pit at the Chicago Board Options Exchange.
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Cash levels jumped and bearish sentiment reached levels not seen for two years according to Bank of America's monthly fund manager survey, but managers have also taken another look at high yield bonds as stocks have been hit.

"The current environment presents the opportunity to take another look at asset classes that had sold off and now look more attractive," BlackRock's global chief investment strategist Russ Koesterich said.

One such asset class is high yield bonds as the yield difference between high yield bonds and higher-quality, lower-yielding U.S. Treasurys has widened out to the highest level in a year, he said.

"This indicates high yield bonds offer better value. Given that corporate America remains strong and default rates low, high yield now looks likely to provide a reasonable level of income relative to the rest of the fixed income market," he said.

Investors at UBS Wealth Management have also been adding to the U.S. high yield credit in light of recent market moves. Global chief investment officer at the bank, Mark Haefele said he had upped his overweight position for the same reason, as U.S. high yield now yields "roughly five percentage points more than U.S. Treasurys."

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"We remain confident that the decline in energy prices will not have a material impact on high yield issuers in the energy sector," he added.

The dollar has also been dubbed a "new defensive" as it has rallied on both weak and positive market days, and has been bolstered by "flight to quality" flows and a general move away from emerging markets.

BofAML asked if there was a "dollar bear out there" in its most recent fund manager survey, as 43 percent of the 220 managers polled by the bank named the dollar the most "crowded trade".

"Rather like the U.S. cavalry charging over the hill just in time to rescue the besieged settlers in a traditional cowboys and Indians movie, the U.S. dollar has had star billing in our portfolio," investment director at investment manager Ruffer, Steve Russell said.

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