January - Early Edition - CI Investments

Signature Market RoundupHigh-yield bondsGeof MarshallVice-President,Portfolio Managementand Portfolio ManagerWith a 15.2% return in 2010, the high-yield bond market hasposted the best two-year return in the short history of the assetclass. Considering the record amount of new issue supplyin 2009 and 2010, this has been astonishing. The markethas had extended periods of above-average returns in thepast, including 1991-1993, 1995-1997 and 2003-2006. Thequestion then is, can the current rally continue?While all-in yields are modest, valuations as measured by creditspreads (the difference in the yield between the corporatebond and a Treasury bond of comparable maturity), whichare currently at +541 basis points, approximate the historicalaverage of +534 basis points. This average, however, has beenskewed by the massive widening of spreads that occurred in2008, so the 1984-2007 average of +456 basis points providesa better yardstick.Strong corporate fundamentals and an improving economyshould ensure that default rates remain low. This makesvaluations even more compelling, with a high likelihoodof further spread tightening. Price appreciation gains fromspread tightening could face a slight headwind from risingTreasury yields, possibly late in the year. In this case, totalreturns would be in the high-single-digit range, but lower thanthe previous year, although we made the same predictionlast year. As such, we consider high-yield bonds the mostattractive part of the fixed-income market and they continueto comprise a core component of our income strategies.WINTER 2011 EARLY EDITION PERSPECTIVE AS AT DECEMBER 31, 2010 15