Monica Erickson, portfolio manager at DoubleLine Capital LP, has a problem. She believes that the corporate bond market for investment rating, which is her specialty, is the worst place for bond investors.
The investment grade range comprised of securities from US companies with the best credit ratings, but this year the negative returns and lower returns were achieved by good “trash” backwards and low qualification.
“The worst place is the investment-grade corporate market,” Erickson said at the Global Investment Meeting 2019 Outlook Summit in New York. “It is very difficult to formulate a case that wants to be an investment”.
It’s not that companies suddenly can not pay their bills, but the links themselves are particularly sensitive to rising interest rates, Erickson said. DoubleLine is led by investor Jeffrey Gundlach, known on Wall Street as Bond King.
The US Federal Reserve has tried to overcome inflationary pressures by raising the reference rate overnight, and markets have also increased long-term yields.
This is a problem for investors who keep the good ones already issued and pay a fixed coupon for years that can not adapt to higher market returns. Investment rating bonds are currently more vulnerable than lower debt securities, as higher credit issuers issue bonds that are paid over a longer period at these fixed rates.
Everything else is the same: If the interest rate rises by one percentage point, the investment grade market drops almost 7 percent, compared to a decrease of about 4 percent in high yield bonds (Bank of America Corp., NYSE: BAC).
Also, the performance of the bonds has a rating of investment grade and government bonds with low risk – the premium investors pay for it is that they take extra risk – under their average of 10 years. These yields could rise as the economy worsens, Erickson said.
Investment grade is also risky, since the “triple B” rating – the rating of values just above the “junk” status – has increased since 2008 by 20 percent of all investment-grade credits. Spectacular fashion currently around 50 percent, he said. These companies are at greater risk of lowering when the next economic downturn begins.
High-yield funds based in the United States this year registered a decline of 0.22 percent, compared to a decline of 2.27 percent for a category that includes corporate-grade investment-grade funds. Search service Refinitiv Lipper.
Erickson thinks it can get worse. In a crisis, investors can not leave their fixed income positions. With the thirty million dollar Triple B market, it is difficult to find a buyer in the market of 1.2 billion high performance.
However, Doble Línea does not believe that a crisis is imminent because the Fed could delay 18 months, if the Fed tried to kneel inflation without damaging the economy.
“Has the Fed reached a soft landing?” She said.
“Without doubt there is a risk.”
Erickson has positioned itself in good ones that are less prone to higher interest rates, including bank loans. These instruments are not as good traditional, since they normally pay more to investors with an increase in interest rates.
There are risks in bank loans. Given the standards of investor flexibility, it is “the best house in the worst neighborhood,” said Erickson.
“I do not think it’s a defensive game, but it’s the right game given the rising interest rates,” he said.