Investment Strategies
High Yield Corporate Bonds Set To Sparkle, Says Western Asset
Falling default rates, increased M&A activity and surging supply should mean that high yield corporate bonds deliver returns in the region of 7-8 per cent this year, according to Ian Edmonds of Western Asset, the Legg Mason subsidiary.
Edmonds, who manages the Legg Mason Global Multi Strategy Bond Fund, notes that default rates remain low while acquisition activity is picking up, and argues that high yield bondholders are set to benefit from investment grade companies snapping up high yield counterparts.
Another supportive factor is that market supply has rocketed this year, currently running in the US at $365 billion on an annualised basis, compared to the $262 billion seen in 2010. The picture is much the same in Europe, notes Edmonds, who points out that much of this issuance has been for refinancing, which is a positive for the market and allays fears about the rising number of maturities coming up in the high yield and loan markets in the coming years.
However, Edmonds warns that high yield returns could be threatened if a global economic slowdown kicks in and credit quality deteriorates before the sharp increase in maturities in 2013 and 2014. This is something the firm is keeping a close eye on, he says.
Having trimmed exposure to investment grade debt across the portfolio Edmonds is focusing his high yield investment on utilities and other defensive sectors. The credit team has also pulled back on emerging markets, where the threat of further volatility has led to a reduction of some of the fund’s dollar-denominated sovereign and corporate debt.
“We have been gradually rotating into local currency emerging market debt, where we are seeing a combination of higher interest rates, as central banks begin to tighten, and gradual currency strength,” says Edmonds.
With regard to duration, Edmonds has cut this by six months to four years.
“This has resulted in us building up some cash, although this is purely opportunistic and tactical to leave us in a position to take advantage of any market volatility in the future,” he says.
