Latest / Bloomberg Intelligence / HSBC's Bowers on Opportunities in the High Yield Market (Audio)

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HSBC's Bowers on Opportunities in the High Yield Market (Audio) · Bloomberg Intelligence

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  Speaker 1: Broadcasting live to New York, Bloomberg eleventh to Washington, d C,
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  Speaker 1: keg of dynamite. Well, it hasn't exploded, at least not yet.
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  Speaker 1: We're gonna be talking about high yield bonds with Mary
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  Speaker 1: Bauer's senior portfolio manager for HSBC Global Asset Management. Right now,
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  Speaker 1: Thank you Charlie from the Bloomberg News Room. I'm Ramie
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  Speaker 1: and we thank you and again recapping stocks fluctuating a
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  Speaker 1: Bloomberg business flash. You're listening to Taking Stock with Kathleen
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  Speaker 1: Hayes and Pim Box on Bloomberg Radio. Eight months ago.
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  Speaker 1: At the beginning of the year, Carl Icon, activist investor.
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  Speaker 1: He said that the junk bond fund market was a
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  Speaker 1: keg of dynamite. Well, well, it hasn't exploded yet. One
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  Speaker 1: of the proxies perhaps for the junk bond market has
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  Speaker 1: been j n K. This is the spider high yield
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  Speaker 1: bond e t F it's gained about. That's from when
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  Speaker 1: carl Icon talked about that keg of dynamite. Here to
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  Speaker 1: tell us more about high yield debt is Mary Bowers,
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  Speaker 1: Senior portfolio manager for HSBC Global Asset Management. Mary Bowers,
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  Speaker 1: thank you for being with us. Tell us about high
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  Speaker 1: yield debt in the context of those statements made by
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  Speaker 1: Carl Icon at the beginning of the year. Yeah, great,
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  Speaker 1: thanks for having me on the show today. I think
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  Speaker 1: what we've seen in HID certainly is pretty significant outperformance
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  Speaker 1: versus what expectations were earlier in the year. A lot
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  Speaker 1: of that has um been the result of what we've
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  Speaker 1: seen happening in oil markets, as well as some retracement
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  Speaker 1: and other commodities. But what we see now is that
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  Speaker 1: in this current low yield environment, there's a very strong
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  Speaker 1: technical bid four yield out there, and we think that
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  Speaker 1: that will continue to support credit markets globally. What do
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  Speaker 1: you mean when you say that there is a technical
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  Speaker 1: bid well, as you have seen, as the world has
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  Speaker 1: seen really um post Brexit has been a tremendous amount
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  Speaker 1: of debt that's been brought into negative Great Territory, So
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  Speaker 1: that's only continued to increase, and we see continued central
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  Speaker 1: bank accommodation, particularly outside of the US, and when I
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  Speaker 1: was out on the road most recently, particularly in Europe,
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  Speaker 1: what I'm hearing from investors is this search for yield.
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  Speaker 1: I mean, it has really pushed investors into riskier asset
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  Speaker 1: classes in order to earn return, and particularly in the
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  Speaker 1: US and emerging market credit markets, we see a significant
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  Speaker 1: opportunity to pick up yield versus what you've ben earn
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  Speaker 1: in other parts of six income. High yield bonds defined
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  Speaker 1: as non investment grade debt with a double B one,
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  Speaker 1: double B plus, double B plus or below ratings. This
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  Speaker 1: is based on the rating system used by Moody's Investor Service,
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  Speaker 1: Fitch Ratings or Standard and Poors tell us about default rates,
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  Speaker 1: have we seen an increase? Well, certainly that's been pretty
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  Speaker 1: well telegraphed that high yield, particularly in the US, has
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  Speaker 1: seen a significant increase in defaults from what was pretty
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  Speaker 1: well blow historical averages. So the uptick though in default
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  Speaker 1: rate has really been you know, just in energy and
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  Speaker 1: to a certain extent um some of the metals and mining,
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  Speaker 1: but mostly in the energy space. And what I like
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  Speaker 1: to remind investors is that these the the event and
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  Speaker 1: high yield was really oil retracing from well above one
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  Speaker 1: down to six to five down to and this has
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  Speaker 1: really happened over the last eighteen plus months. At this point,
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  Speaker 1: the bond prices and energy have already moved to reflect
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  Speaker 1: this lower oil price. So just to say that the
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  Speaker 1: bankruptcies that were primarily seeing in high yield, it's very
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  Speaker 1: well telegraphed in the market. And again for an active
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  Speaker 1: investor being able to avoid some of these more troubled
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  Speaker 1: parts of the high old market. We think that if
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  Speaker 1: you're able to look away from some of the more
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  Speaker 1: troubled spaces, whether it's energy and maybe also to a
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  Speaker 1: lesser extent, I said all as the mining, but also
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  Speaker 1: maybe retail for example, UM companies balance sheets look pretty healthy,
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  Speaker 1: so that uptick. Yes, we will continue to see a
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  Speaker 1: fairly elevated default rate in high yield UM, but we're
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  Speaker 1: not going to see the same spike and default rate
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  Speaker 1: as we saw back in the financial crisis, we don't believe.
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  Speaker 1: But also we think that you can avoid some of
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  Speaker 1: these trouble sectors and still earn a reasonable yield again
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  Speaker 1: versus what you can earn in other parts of fixed income.
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  Speaker 1: What is what what do you call a reasonable yield? Well,
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  Speaker 1: the current yield in the US is just above six
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  Speaker 1: and a half percent UM, so compared with where tenure
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  Speaker 1: treasuries are, that certainly still looks pretty attractive when you
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  Speaker 1: consider this still low default rate outside of some of
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  Speaker 1: these more maligned sectors. Now I have talked about US
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  Speaker 1: high yield, but looking more globally, in Europe, the credit
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  Speaker 1: cycle is a little bit behind where we are in
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  Speaker 1: the US in terms of releveraging, and we aren't seeing
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  Speaker 1: the same pick up in default rate there um or
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  Speaker 1: you know, some of the deterioration and credit metrics in
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  Speaker 1: terms of releveraging. Similarly, in the emerging market, we have
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  Speaker 1: a bit different characteristics there when we talk about high
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  Speaker 1: old credits, given that a lot of the companies in
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  Speaker 1: that market are more quasi sovereigns, so they have some
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  Speaker 1: support either implicit or explicit from from government. Thank you
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  Speaker 1: very much for joining us. Mary Bowers is the senior
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  Speaker 1: portfolio manager for HSBC Global Asset Management, giving us her
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  Speaker 1: views on the high yield bond world. Since the start
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  Speaker 1: of the year, the yield on the ten year US
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  Speaker 1: Government Treasury has dropped about High yield bond funds are
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  Speaker 1: among the top performing bond fund categories this year. As
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  Speaker 1: a group, the sector is up a little bit more
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  Speaker 1: than nine year to date. This is taking stock. I'm
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