Market ready to shift in sentiment
Although high-yield fundamentals remain positive, investors might want to adopt a highly selective (active) and cautious approach, according to Eaton Vance’s high yield portfolio manager, Jeffrey D. Mueller.
He stressed that the pickup in market volatility in the first three months of 2018 due to fears of inflation, valuation levels and diminishing central bank largesse took their toll on investor sentiment.
Following this, some investment professionals warned that the stage was set for a protracted correction in credit risk premia.
“Clearly, we are moving towards the end of the credit cycle, but – in the case of global high yield bonds – we see a number of factors which are supportive of the near-term prospects for the asset class,” Mueller said.
Other factors supportive of the near-term prospects for the asset class included:
- Signs of economic improvements in the US and Europe, which would help strengthen balance sheets and should continue to support low default rates
- US tax reform, which represents a net-benefit for approximately 75 per cent of high yield issuers in the US market
- A supportive technical picture in the short term for corporate credit in Europe
However, Mueller also stressed that there was a number of reasons why investors would choose to become more cautious and this included lending standards which would continue to ease, the spread-to-worst in the high yield market was close to post-crisis tights and current valuations discount and diminishing central bank support.
“Weighing up both the potential risks facing global high yield as well as the many factors supportive of the near-term prospects for the asset class, we are adopting a slightly defensive skew with a tilt toward lower-yielding, higher-quality issues,” Mueller said.
“Our positioning is informed by both the tightness of valuations and an expectation of increasing volaitility.
“We feel our slightly defensive posture and our continuing focus on generating attractive risk-adjusted returns will enable our strategy to outperform during heightened volatility when markets weaken, while seeking to capture most of the upside when markets rebound.”
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