Junk bonds and leveraged loans are still attractive asset classes, according to James Keenan, head of BlackRock Inc.’s leveraged finance group, which manages more than $28 billion.
While some investors may start to seek assets such as cash and Treasuries that are perceived as safer because of growing concern that economic growth is faltering, the accommodative policy of the U.S. central bank is creating an environment where over the next five to 10 years holders will suffer “a negative real yield,” New York-based Keenan said in an interview on “Surveillance Midday” with Tom Keene.
BlackRock favors leveraged loans, which typically pay floating rates and are sheltered from rising interest costs. While the Federal Reserve has pledged to keep its benchmark rate near zero until the end of 2014, investors may be growing concerned that it will tighten its policy before that.
U.S. floating-rate funds in April had the biggest inflows in 11 months, according to preliminary data from EPFR Global, a Cambridge, Massachusetts-based research firm. Investors put $729 million into the funds, the most since $2 billion in May 2011.
“We like the loan market, with regards to no duration but real capital protection,” Keenan said. “If a company was to file bankruptcy, your loan recovers about 80 cents, so there’s a lot of protection in that.”
While Europe’s debt crisis is heating up with Greece struggling through a political crisis that threatens to damage the region’s economy, BlackRock continues to hold bonds of some of the continent’s high-yield companies.
“We own some European high-yield companies mostly in the northern region,” Keenan said. “A lot of the companies in Germany, the Netherlands, the U.K., especially the more infrastructure plays around telecom or cable, provide a lot of value and the cash flows are very, very stable.”
High-yield, high-risk, or junk debt is rated below Baa3 by Moody’s Investors Service and lower than BBB- at Standard & Poor’s.
To contact the reporters on this story: Heather Perlberg in New York at firstname.lastname@example.org; Tom Keene in New York at email@example.com
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