'Risky' places where investors are finding returns

As fixed income markets continue to show little resemblance to anything approaching normality and head into negative yield territory, a new research report has shone light on the corners of the market that investors have flocked to in search some return.

"The current trading environment has seen investors struggle to secure yield, pushing many towards riskier or more niche assets in order to gain the most attractive returns," Neil Mehta, a fixed income analyst at research firm Markit, said in a note on Thursday.

Mehta's analysis shows that bond funds have seen a strong start to the year. Investors have already piled $30.5 billion into fixed income exchange-traded funds (ETFs) to date, which is well over a third of the total 2014 inflows, according to his statistics.

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Some of the biggest moves have been into the high yield space, which is expected to have its best quarter since the first three months of 2012, according to Mehta. Investors poured over $3 billion into the iShares iBoxx high yield corporate bond ETF which trumped inflows into investment grade funds like the iShares iBoxx investment grade bond ETF and the iShares euro corporate debt bond ETF.

"New appetite for high-yield highlights an increased willingness to take on more risky forms of debt in search for higher returns," Mehta said.

The European Central Bank has joined the U.S. Federal Reserve, the Bank of Japan and the Bank of England this month by delivering a sizeable injection into its economy with a quantitative easing package. By making large asset purchases in the bond markets they are pushing up the prices of fixed income assets and therefore pushing their yields lower - with yields having an inverse relationship to prices.

Retail investors and major insurance firms are therefore left with little yield on their usual assets. Some economists believe central banks are trying to squeeze them out of these markets and push them to pour money into other areas of the economy and stimulate growth. For example, Allianz said last week that it was raising its investment in real estate, infrastructure and renewable energy by 30 billion euros, hoping to "avoid the impact of the artificially low interest rates."

But it looks like cash is finding its way into junk bond areas too, which are otherwise known as speculative-grade debt. Debt issued by "riskier" firms has been a popular vehicle for investors to secure yield, according to Mehta. He highlighted that the trend remains popular in Europe and the U.K. where issuance is picking up to meet demand. He also highlighted a new offering from Valeant, a pharmaceuticals company, which he said was in the process of issuing the second largest "junk" offering to date.

Mehta found that investors, in the hope of finding more yield, are also moving to longer-dated securities as well as subordinated debt. The latter are bonds that are lower down a firm's capital structure, which means investors are more likely to lose out in the event of a default.

"Investors have found this extra yield very attractive, as the spread of the index over (German) bunds has narrowed significantly in the last six months," he said.

"Total, a double-A rated oil company recently issued deeply subordinated 6 year debt offering a 2.25 percent coupon, to great investor demand."