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Time to ditch HY is on the horizon, says JPM bond chief

Time to ditch HY is on the horizon, says JPM bond chief

High yield bonds could be heading for another bout of volatility with investors minded to keep a close eye on the credit cycle by JPM’s head of global fixed income.

Citywire + rated Bob Michele said in an investor update that he is finding opportunities in the sector but is increasingly alert to sudden shifts which have rocked the high yield market.

‘The key with high yield, as with other credit sectors, is to know when to take your chips off the table. As we move through the year, we are increasingly sensitive to signs that exuberance has taken hold and that downside risks are beginning to outweigh upside opportunities.'

'In some of our more risk-averse strategies, that time may be sooner rather than later,' added Michele, who co-runs the $984 million JPM Global Bond Opportunities fund with Nick Gartside and the Citywire + rated Iain Stealey.

The top sector allocation in the fund is US high yield at 26.5% followed by non-US high yield at 17.2%. Despite longer-term concerns, Michele thinks high yield bonds currently benefit from central bank liquidity.

‘European high yield remains our top idea. Yields may seem low, but spreads on a credit by credit basis are comparable to those in the US and are poised to tighten as investors search for yield. European growth is also supportive of improving fundamentals and potential upgrades.

‘European high yield is even more attractive on a fundamental basis and is yielding approximately 5%, which is all spread if you consider that the risk free rate in Europe is effectively negative,’ he said.

Michele added it had outperformed its US equivalent for the past four years, although US high yield still held promise.

‘US high yield was recently trading on a spread of 700 basis points over government bonds – indicating investors can get an 8.5% average yield. In our view, default risk has been priced into the market and investors are being well compensated,’ he said.

Sweet spot

Elsewhere, Michelle thinks global growth has decelerated and the chance of economic recession is rising. However, fixed income would do well despite these headwinds.

‘Weaker productivity and aging populations are constraining trend growth rates in the developed world and it’s only a matter of time before levels of emerging market leverage creep to unsustainable levels and have to be unwound, a process that will take decades,’ he said.

‘One could argue fixed income finds itself in something of a ‘sweet spot’ – low economic growth, low global inflation, continued highly accommodative central banks with no evident or immediate catalyst for core government bond yields to inch higher.’

The JPM Global Bond Opportunities fund returned 9.4% in US dollar terms over the three years to the end of March 2016. This compares to a rise of 2.6% by its Citywire-assigned benchmark, the Barclays Multiverse TR USD Unhedged, over the same timeframe.

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