Yield chasers have plowed into high-yield bonds in recent years, but with interest rate hikes looking increasingly likely, it may be time to head for the exits, analysts said.
"Not only do too many macro headwinds exist to create a compelling story for high yield, but fundamentals are the weakest they have been since the recession -- likely creating an environment where looking for a reason to sell becomes easy," analysts at Bank of America Merrill Lynch said in a note Thursday. "We caution investors to not grow complacent.
Other segments of the bond market have already faced a sell off. German bund yields have zipped higher, with the 10-year bund yield rising to around 0.85 percent last week from around 0.07 percent in April and pulling European sovereigns and U.S. Treasury yields up with them. Bond yields move inversely to prices.
U.S. yields have also been pushed higher by signs of economic improvement and the prospect that the U.S. Federal Reserve may hike interest rates this year for the first time since it went to a zero interest rate policy in 2008 during the Global Financial Crisis. Higher yields on the U.S. Treasurys, which are considered a "safe" segment of the bond market, would likely also spur selling riskier paper, like junk bonds, as investors can get a higher return with less risk elsewhere.