Interview
Investing in High Yield Bonds and Bank Loans
- Anticipates a solid year for high yield and bank loans in 2021, with performance expected to pick up in the back half of the year as vaccines are distributed and pent-up consumer demand materializes.
- Forecasts U.S. high yield returns of 4% to 5%, European high yield returns of 3% to 4%, and bank loan returns of 4.5% to 5.5%, while noting that spreads are expected to remain relatively range-bound.
- Expects continued inflows into the bank loan asset class throughout 2021 and into 2022, driven by low or negative global rates and investor yield-seeking behavior.
- Identifies bank loans as an attractive investment due to their floating rate component which steps up with potential Fed rate increases, their secured status via company or real asset collateral, and their position in the capital structure with minimal duration.
- Notes that CLOs act as buy-and-hold investors, contributing to bank loan price stability, lower volatility, and improved risk-adjusted returns.
- Observes a significant migration from investment grade to high yield involving approximately $200 billion in downgrades during 2020, resulting in double-B-rated securities comprising about 54% of the high yield market.
- Predicts a trend of falling investment grade companies transforming into rising stars over the next 12 to 24 months, distinguishing them from energy sector high yield companies that were deemed unsustainable at lower oil prices.
- Emphasizes the critical role of active management in security selection and default avoidance to evaluate individual credit idiosyncratic risks, particularly in an environment where the market absorbed a large volume of downgraded paper.
- Suggests there is room for bank loan price appreciation, contrasting market expectations of rate increases with the Federal Reserve's current stance of no immediate urgency to raise rates.