The high yield market is currently constrained by businesses too scared to issue bonds but coordinated stimulus measures could lead to bolder action two high yield bond specialists have said.
MacKay Shields’ Lou Cohen and Tatjana Greil Castro of Muzinich both said uncertainty and the long shadow of the 2008 crisis have caused concern among companies looking to issue bonds but suggested QE3 and the OMT could have put paid to this.
Speaking to Citywire Global, Cohen, who works alongside leading bond manager Dan Roberts on the Nordea 1 - Low Duration US High Yield Bond and Nordea 1 – US High Yield Bond funds, said fear is commonplace at present.
‘One thing that has held back high yield issuance is a reluctance to leverage large amounts of capital, so financial borrowing to build new plants or invest through bonds has been limited,’ he said.
‘Quite frankly we would suggest there is an overall psychological hangover from what happened back in 2008.’
Unlike his peers, Cohen said company reluctance was the major factor behind the current tough market conditions and was much more of a problem than competition for bonds, or the growing influence of ETFs.
He said: ‘At the margin, when an ETF or any large buyer shows up at the same time then the price is more likely now to recognise that and so it has become very much a factor of short term volatility.’
The Nordea 1 – US High Yield Bond fund has returned 47.35% over the past three years.
Despite it falling 1.5% below its benchmark, the BofA Merrill Lynch US High Yield Cash Pay TR USD index, it is the seventh best performing high yield fund of the 35 with a three year track record.
Meanwhile, Greil-Castro, who runs the Muzinich EuropeYield and Muzinich EnhancedYield Short Term funds, expects European companies which had held back from issuing bonds due to uncertainty, will feel more comfortable now following the annoucement of OMT.
‘There will be more issuance in high yield and investment grade coming. The ECB’s commitment to protecting the euro is giving the market greater confidence and so more borrowers are deciding to act,’ she said.
‘Many issuers have been waiting for a long time and with conditions becoming more benign they are able to better plan and further into the future without having to worry so much about what is going to happen in the next two months.’
Greil-Castro said she expects well-known names – plus some newer faces – to start issuing bonds over the coming months. She expects default rates to remain below historic averages for the foreseeable future.
The Muzinich EuropeYield Short Term fund is Greil-Castro’s top performing fund, having returned 18.1% over the past three years. This compares to the market benchmark, the Citigroup EuroBIG TR, which rose 14.15% over this period.