JPMorgan Investment Funds - Global High Yield Bond Fund

High time to invest in high yield bonds

The market appears oversold and therefore may be interesting to investors

Important information
Information of the JPMorgan Investment Funds - Global High Yield Bond Fund, including the risk profile, investment process and main features of the fund:
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High time to invest in high yield bonds. January 2009

The market appears oversold and therefore may be interesting to investors
High yield corporate bonds appear to offer value at present, with yields in double digit figures and at historic all-time highs. The yields relative to equivalent government bonds ('spreads') are also at multi year highs. It is our belief that the high yields are pricing in a greater amount of default than we will actually see. Just as investors were overconfident about financial markets in the period up to the credit crisis, so investors are now overly pessimistic: the defaults that we will see in 2009 are probably already priced into the market. Therefore, in a world of low and falling bank deposit rates, low government bond yields and weak equity markets, high yield bonds look attractive relative to other investments.

A market of opportunity
Over the last year or so we have seen prices fall dramatically in the high yield market, reflecting investors' fear of default. This has created an interesting investment opportunity, because actual defaults, so far, have been at relatively modest levels. We do expect an increase in 2009 in defaults but the total should remain below current market expectations. Investors appear to have oversold the market and as a result we believe it looks attractive at current levels.

Determining an entry point
Historically, when the spread of high yield bonds over US Treasuries (ie, the difference in the yields) is greater than 1,000 basis points it has proved to be a good time to enter the market. We are currently well over 1000 basis points.
It is interesting to note that compared to previous downturns in the market, such as 1990-91, corporate borrowers are in a strong position. They are generally larger companies than has been the case in previous downturns, they have firmer balance sheets and can demonstrate greater financial flexibility. This makes the generous spread over Treasuries even more curious.

Bargain hunting in a battered economy
Our investment strategy is to focus on defensive or non-cyclical sectors, since the weakness in the global economy appears to be worse at the consumer level. We have a bias towards quality rated bonds within the sector. However it is worth mentioning a risk area that we are interested in: distressed debt. This can offer significant returns when markets improve, as near-bankrupt companies are pulled back from the edge. More opportunities in this sector should arise in 2009.