It’s difficult to spot an upside in the high yields market since there has been an enormous rally in the segment with all time high dollar prices and all time low yields in the history of these industries.
Still, compared to other bond markets, the high-yield segment offers better returns, says Jeff Peskind, Chief Investment Officer and Founder of Phoenix Investment Advisers. In a low interest rate environment, it’s better to take credit risk with junk bonds than to take duration risk with higher rated bonds because if interest rates go up, junk bonds on credit is where investors really need to be, he observed.
Asked if there’s a little bit of frothiness in the corporate credit market as many companies are taking advantage of the low interest rate environment to refinance and issue new debt, Jeff said there’s little bit of fizz in the market because the structures in some of these companies are a little bit weaker than they were a few years ago. But the situation is different from 2007 since a lot of companies had a lot of leverage and very little liquidity then. The same companies are in a much better financial shape today because they are very liquid and they have a lot of time left to go before the big maturities. So it’s a weird world where the credit quality is good, the dollar price is high, the yield is low, but it’s still not a bad place to be in, he noted.
Asked to comment on the fundamentals of these companies, given banks are more willing to fund these companies to avoid a default, Jeff said it’s true a lot of banks are willing to refinance the upcoming maturities of these companies, creating a lot of frothiness in the credit market.
But a lot of these companies have done a very good job (of restructuring) by cutting costs, adding to liquidity and pushing up the maturities. And that’s another reason why investors should be in the credit risk market for the next few years because default rate are going to stay low. As default rates stay low, investors can expect a decent return in the credit space, he added.
Asked why he likes the CCC rated bonds, Jeff said in a low default rate environment, that is where the yield is because there’s really a very level return in the higher quality part of the high yield market. Yield in CCC bonds vary between 8 and 15 percent and decent returns can be achieved if the right bond is found, he argued.
Asked if the Fed is the only catalyst that can make him change his views, Jeff said there are other factors such as huge funds flowing in the levered loan market. There are funds which make loans to a lot of these levered companies and they are now actively refinancing these CCC rated loans in the market. As long as the Fed is going to stay accommodative and there’s a lot of money in these loan funds, the credit space is going to be very strong fundamentally, he noted.
Asked if he finds any similarity between now and 2007 – when there was a comparable rise in the levered loan market, Jeff said indeed there are similarities though the growth has just started now. The levered loan funds have not done anything crazy till now. But since there’s this fizz and not a bubble yet, it needs to be closely watched, he concluded.
You can watch the video here.
Contact Ulli