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Don’t despair over default talk, says $21bn HY manager

Don’t despair over default talk, says $21bn HY manager

High yield bond defaults in 2015 look set to exceed those seen over the past few years but investors are ignoring the fact the market is still way below historical averages.

That is according to Gershon Distenfeld, co-manager of the $21.8 billion AllianceBernstein-Global High Yield Portfolio fund.

In a commentary piece, Citywire + rated Distenfeld, who co-runs six funds at the US asset manager, said investors are fretful over the impact of the significant drop in oil price on energy companies issuing high yield bonds and the knock-on effect of a rise in interest rates.

‘Defaults are not a short-term concern,’ Distenfeld said. ‘Chances are default rates in 2015 will exceed those we’ve seen over the past two or three years.’

‘But remember, rates have been at extremely low levels for quite some time now, and even a higher default rate in 2015 would be well below the long-term average.’

The prospect of defaults largely stemming from the energy sector, which accounts for around 15% of high yield bond issuance, have been raised in recent weeks following the collapse in the oil price but some leading managers have sought to dismiss immediate threats to the sector.

While defaults won’t be a major hurdle to overcome, Distenfeld said a more pressing concern would come to the fore if investors decided to leave the high yield bond space en masse, creating pronounced liquidity problems.

‘High-yield returns could take a hit if everyone rushes for the door at once. But, once again, remember that investors who stayed the course during the taper tantrum had the last laugh,’ he said.

‘What’s more, when it comes to fixed income, time is often an investor’s friend. For example, US high yield has yet to log a negative return over a 24-month period. This goes even for periods that include 2008, the year the global financial crisis hit markets hardest.’

No rates rise panic

Pointing to one major event preoccupying many fixed income investors, Distenfeld said the Federal Reserve’s planned interest rate hike is nowhere near as catastrophic as some bond managers have suggested.

‘Fed rate hikes are not the end of the world. Yes, the Federal Reserve appears likely to start raising policy rates sometime this year. And, yes, that will cause a great deal of volatility in financial markets, such as the Fed’s 2013 announcement about tapering monthly asset purchases did,’ he said,

‘But here’s what we learned from that episode, now affectionately—or perhaps not so affectionately—known as the “taper tantrum”: those who hunkered down and stayed invested came out ahead; the Barclays US High Yield Index earned a healthy 7.4% return. We think things could play out in a similar fashion this time around.’

High yield bonds make up 56% of the AllianceBernstein-Global High Yield Portfolio at present, with investment grade corporates (13.7%) and emerging market hard currency (8.7%) and local currency bonds (5.6%) well-represented.

The AllianceBernstein Global High Yield Pf has returned 19.6% in US dollar terms over the three years to the end of January 2015. Its Citywire benchmark, the BofA Merrill Lynch Global High Yield TR, rose 22.7% over the same timeframe.

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