The high-yield bond bubble could be about to burst if the governments of the US and UK decide to pull the plug on quantitative easing (QE).
This warning to investors comes from Duncan Lawrie Private Bank, which says that by pumping liquidity into global markets, QE has helped to swell a number of investment sectors and create dangerous market valuations.
In May, Ben Bernanke, chairman of the Federal Reserve, said that the US central bank might scale back its QE programme if the country’s job market showed signs of ‘sustainable improvement’ while the UK has had its programme on hold since last autumn.
James Humphreys, investment manager at Duncan Lawrie Private Bank, said: "There can be no question that a big change in monetary policy, like the withdrawal of QE, will have huge implications for global markets, not least because all the money sloshing around has had a significant impact on some sectors that would otherwise have remained somewhat lacklustre.
In particular, he identified the US corporate high-yield market, which is made up of the bonds issued by sub-investment grade corporations – otherwise known as ‘junk’ bonds. “The amount of liquidity poured into the economy has meant that this market has benefited from much greater demand than it would have had otherwise and, in effect, it is keeping certain corporations alive that would have faltered.”
He concluded: “Ultimately, this means that investment capital is not finding its way to viable small- and medium-sized businesses with good growth prospects."
Sally Percy is editor of The Treasurer