AllianceBernstein Holding LP (AB:US), which manages $437 billion of assets, sees no bubble in the high-yield bond market, saying prices are justified by issuance trends and creditworthiness.
Investors will reap a “relatively attractive” return of about 6 percent to 8 percent this year buying global junk-rated debt, Jeremy Cunningham, a London-based senior portfolio manager, said at a media briefing in Sydney today. Sales of new debt will be outweighed by redemptions while the outlook for companies is strong, bolstering the asset class, he said.
Investors repressed by near-zero benchmark interest rates in the U.S., the euro region and Japan are paying up for debt from lower-rated companies, driving spreads to levels seen in late 2007 before the global financial crisis worsened. U.S. Federal Reserve Governor Jeremy Stein said last month some credit markets, such as corporate debt, are showing signs of potentially excessive risk-taking.
‘We certainly don’t think we’re in a bubble scenario,’’ Cunningham said. “The supply and demand dynamic remains supportive for high-yield corporate bonds and in addition to that, fundamentals remain very supportive.”
AllianceBernstein expects company default rates to remain low and high-yield spreads to tighten “slightly” further, he said.
Non-investment grade debt, also known as high-yield or junk, is rated below BBB- by Standard & Poor’s and the equivalent Baa3 by Moody’s Investors Service.
Investors should favor junk debt with grades of B or higher, Cunningham said, as lower ratings don’t offer enough extra reward for the risk.
Companies are starting to take advantage of the demand for debt by offering notes of lower credit quality, so buyers need to be selective, he said.
Yield premiums on global high-yield debt averaged 497 basis points more than government debt yesterday, down from 777 in June, Bank of America Merrill Lynch index data show. Spreads peaked at 2,193 basis points in late 2008 after the collapse of Lehman Brothers Holdings Inc., from 578 at the end of 2007, the data show.
AllianceBernstein is favoring high-yield bonds sold by European companies, including banks, as well as emerging-market sovereign notes, according to a presentation distributed at the briefing.
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