The Federal Reserve should have started raising interest rates earlier this year given the strength of the US economy, AB’s head of high yield Gershon Distenfeld has said.
Speaking to Citywire Global, he said the central bank should have taken a more proactive step in order to reduce its long-held accommodative policy.
‘We think the Fed should have started hiking rates already, earlier this year. The longer they wait, the more potential there is for asset bubbles down the road,’ he said.
‘Unemployment rate is back at 5.5% and the country’s general economic outlook is positive. We are not saying the Fed needs to hike rates at 4% or 5%, but we think it's time to scale back this unprecedented policy.’
At the same time, Distenfeld doesn’t think a rates hike is going be the end of the world for fixed income. ‘We'll see some volatility and retail selling. But we don't really stay up at night worrying about the hike. Making sure we are invested in the right securities is definitely more important.’
Distenfeld’s best case scenario now is for the Fed to raise rates in June. ‘More than the timing, it is a question of pace and magnitude. We expect the hike to be very measured in order not to kill the recovery.’
Meanwhile, in his Global High Yield fund, Distenfeld has taken down some of the European high yield exposure over the past four months. ‘We've owned a lot European HY debt in the past three years and it has performed very well. We thought it was the right time to take some profits,’ he said.
The team decreased its European HY position by 2% and now holds less than 10% in the asset class. Meanwhile, they increased US exposure, which is now 65% of the portfolio. ‘In Europe risky assets rallied in anticipation of QE, while in the US they rallied because of QE,’ he said.
‘Away from the energy sector, we haven't seen companies in the US taking very aggressive re-leveraging transactions like during the last cycle. We expect them to benefit from a stronger economy and prefer high yield corporates to emerging market sovereign debt,’ he said.
An expensive market
Distenfeld manages a highly diversified portfolio and is currently struggling to find cheap opportunities in the market. ‘Over the past few years, we have seen so many dislocations in the market. Now, there's nothing that's severally dislocated in our opinion,’ he said.
‘Given current conditions, we continue to caution against reaching for yield and maintain the portfolio’s overall beta in a historically low range.’
One area that he’s finding quite cheap is banks’ subordinated debt, particularly in Europe. ‘They are essentially trying to turn banks into utilities, which is bad for equity holders, but good for credit investors.’Over the past three years to April 2015, the AB Global High Yield fund returned 18.27% in US dollar terms. This is while its Citywire benchmark, the BofA Merrill Lynch Global HY index, rose 22.40%.