Junk Bonds: Best in Class or Dangerous Bubble?

High-yielding risky bonds continue to perform well, and the asset class is set to be among the best performing of 2013, according to Swiss bank Sarasin. 

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Junks bonds, or high-yield debt (HY), are fixed-income instruments that carry a rating of 'BB' or lower by Standard & Poor's, or 'Ba' or below by Moody's, and have a higher risk of default compared to safer investment-grade bonds. 

With central banks in the U.S., Japan and Europe buying up their own treasuries, yields have remained at record lows for these sovereign bonds, forcing retail and institutional investors to seek yieldelsewhere.

"2012 was a fantastic year for the credit markets – in particular for high yield bonds," Sergio Andenmatten, senior credit analyst at Sarasin said in a research note. "European investment grade returned roughly 14 percent and HY nearly doubled that at 23 percent."

(Read More: How the Fed Is Pushing Investors to Buy Junk Bonds)

Credit markets simply cannot match last year's performance, according to Andenmatten, but he says the bonds will still be among the top performing asset classes this year.

"In line with market consensus, we expect HY to return 9 percent in 2013. These estimates are higher than the consensus forecast of 4.7 percent for the European stock market," he said.

Single-B bonds - deemed as speculative - offer the most value, he said, as he expects a continued bleak outlook for global growth to have a positive technical impact on high yield.

(Read More: Desperate for Returns, Investors Pour Into Junk)

"In an environment of low interest rates and low growth, investors are forced to search for yield outside (investment grade) and sideward trending equity markets. In this environment, HY bonds look particularly attractive," he said.

Andenmatten's view may not be against the grain, but as the Financial Times reported on Wednesday, some credit investors have been raising their bets against junk bonds.

Apollo Global Management, Oaktree Capital, GSO and the credit arm of Blackstone are just some of the names that the report cites. Talk of a "bond bubble" and a sudden rise of interest rates has meant these firms have either reduced their holdings or have taken up short positions.

(Read More: Big Investors Lead Bets Against Junk Bonds)

Jonathan Compton, managing director at Bedlam Asset Management, was the latest in a long line of investors to warn about the asset class. Specifically targeting emerging market bonds he said the dangerous inflows into the securities was truly extraordinary.

"In emerging markets there is one of the most dangerous bubbles developing in the bond markets they've ever seen," he told CNBC Thursday.

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