After nearly two years of rising interest rates and elevated yields, PGIM Fixed Income’s Jonathan Butler thinks today’s bond market favours high yield investors. Despite headwinds on the horizon, he believes it could get even better.
While investors already are benefiting from all-in global high yields in the 9 to 10% range, volatility could potentially widen credit spreads and present significant opportunities.
‘We’re going to see much more volatility for a number of reasons,’ said Butler, Head of European Leveraged Finance and Co-Head of Global High Yield Strategy at PGIM Fixed Income. ‘There are lots of concerns and issues out there, but that’s actually what drives opportunities. We think the outlook is quite positive for high yield.’
Supply challenges set to ease
Lack of supply has challenged high yield investors since early 2022. Butler noted that companies have been reluctant to borrow at interest rates more than double what they were several years ago, leading to a low volume of high yield bond issues and tighter credit spreads. That likely will change soon as companies realise they need to raise capital.
‘They have been waiting and delaying, but now they’re running out of time,’ Butler said. ‘As we start to see more supply, that could well lead to spread widening.’
Expecting a soft landing
Recession fears also have hampered the high yield fixed income market, with investors worrying about potentially slower growth and higher debt defaults. Yet PGIM Fixed Income’s default outlook is muted because credit quality in the sector is currently high. Given these conditions, Butler anticipates high yield bonds would hold up well in a downturn and likely would outperform equities.
While risks remain, PGIM Fixed Income sees economies in both the US and Europe achieving a soft landing rather than tipping into a recession.
‘If a recession does come, we think it will be mild,’ Butler said.
Navigating uncertainty with an experienced active manager
PGIM Fixed Income’s deep and experienced high yield bond team can help investors navigate this uncertainty. Sector portfolio managers and analysts collaborate to create dedicated mini teams that frequently evaluate and rank the portfolio’s existing debt holdings as well as potential investments they are considering. Their best ideas often end up as large positions in the portfolio, Butler said.
‘It’s the experience and size of the team, along with our process, that enables us to deliver consistent returns,’ Butler said.
Source: As of November 2023
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