HOW TO PLAY IT-Canada asset managers see lower junk bond returns

Mon Mar 4, 2013 4:12pm EST
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* High-yield bond funds seen slowing after stellar 2012

* Yield-hungry investors drove up demand

* Default rates are very low, but new issuers flood in

By Andrea Hopkins

TORONTO, March 4 (Reuters) - After three years of fantastic returns and a particularly stellar 2012, Canadian asset managers predict a return to earth for high-yield bond investments as surging demand and recovering stock markets take the shine off junk bonds.

While no one is saying the party is over - solid single-digit returns will still far outstrip returns on government or investment-grade debt - wealth managers say it is time to start reducing the expectations of junk bond buyers.

"We had a great year last year, our life was wonderful and the sun was shining every day," said Lorne Steinberg, president of Montreal-based Lorne Steinberg Wealth Management, whose Steinberg High Yield Fund notched a 13.7 percent return in 2012.

"This year we are cautioning clients that the lovely double-digit return in 2012 is not going to be repeated in 2013 ... we're looking to be in that mid-single digit, that 6 percent area this year."

Bonds of the riskiest U.S. companies have delivered a total return of 143 percent since bottoming in December 2008. A widely followed measure of the sector, the Bank of America/Merrill Lynch High Yield Master II Index, hit a record high in January and sits just a smidgen below that record.   Continued...