PGIM Fixed Income’s Jonathan Butler doesn’t mince words regarding conditions for high yield bonds. When it comes to identifying the key factor needed to move investor sentiment in the right direction, the Head of European Leveraged Finance and Co-Head of Global High Yield Strategy finds little reason to equivocate.
‘I think the catalyst is already here,’ he said during a recent interview.
The backdrop is uncertain and likely to stay that way for the foreseeable future. Butler himself anticipates ‘more volatile economic times’ to come. Despite that, the bond market veteran projects matter-of-fact confidence in his overriding argument for optimism. After a 15-year stretch marked by ultra-low interest rates, he maintains that today’s bond yields usher in a new era of opportunity.
‘We've been seeing rates rising now for over a year,’ Butler said. ‘There is yield in the bond markets again.’
Rate Visibility Improves the Outlook
Given his front-row seat to developments that move markets from one day to the next, Butler doesn’t downplay near-term risks, including lingering recession threats in some of the most interconnected regions of the global economy. He recognizes that the level of uncertainty means that most assumptions remain vulnerable to revision.
Still, from an unexpected extension of tightening among central banks to an earlier-than-anticipated policy pivot to easing, the current debate regarding the interest rate outlook does not include the kind of seismic shift in them required to make current yields notably less compelling. Elevated rates and improved visibility surrounding them add stability to fixed income’s foundation.
An Active Approach Can Accentuate the Opportunity
According to Butler, the good news for bonds is even better news for active investors.
‘If you believe in defaults being moderate as we experience change in the economic cycle, then you're being very well compensated for the anticipated loss at an index level,’ Butler explained. ‘If you believe in the capabilities of your research team, then hopefully we're going to be able to outperform in that market and achieve strong returns.’
Supported by a large team based in the U.S. and Europe, Butler’s view is influenced by collective insights gathered through bottom-up fundamental credit research. Portfolio managers supported by senior analysts and junior analysts are dedicated to different sectors to make the most of their industry expertise.
Finding Value in Volatility
Viewed through a short-term lens, market volatility is unwelcome in that it reflects erratic investor behavior. But, for fundamentals-driven investors, sweeping responses to uncertain conditions invariably create longer-term opportunities because they tend to reflect attitudes regarding overall risk rather than security-specific concerns.
Butler believes recent market action leaves an ample supply of securities with prices that appear disconnected from their underlying fundamentals, fostering favorable conditions for with credit research and security selection.
‘We're an active manager, and we feel that this is a good time for us to be investing,’ he said.
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