Portfolio Manager Perspectives

Jeff Benjamin

What's attractive now: Higher-quality junk bonds

Payden's Sabur Moini sees fundamentals improving — and default rates plunging — for top high-yield corporates

Dec 15, 2009 @ 11:04 am

By Jeff Benjamin

Higher-quality high-yield corporate bonds are getting more attractive on a fundamental basis, according to Sabur Moini, manager of the $695 million Payden High Income Fund (PYHRX), offered by Payden & Rygel Investment Group.

“This has been a very strange and unprecedented market, but the fiscal and monetary stimulus we've had this year has been unprecedented as well,” he said. “Right now the high-yield market is getting healthier and that's when you want to get in.”

A year ago, when most markets were experiencing peak panic levels, Mr. Moini was going against the grain by making the case for a move into high-yield bonds.

“Nobody foresaw the massive rally in high-yield that we've had,” he said. “But last year we were telling clients the sell-off was technical in nature because a lot of the companies were still in good shape and were throwing off lots of cash flow.”

Just as the initial sell-off was technical and driven by broader economic influences, Mr. Moini said the high-yield rally this year has been mostly a high-beta technical move.

“We're now getting to the stage where fundamentals will start to improve,” he said. “The market has gone through a lot in the last 18 months.”

The fact that high-yield strategies have taken in more than $30 billion this year illustrates both an investor thirst for yield and the degree to which the market was oversold late last year.

“As the Fed and Treasury set up programs it has put liquidity into the market,” he said. “Right now you have high-yield funds yielding 8% while the short term interest rates are near zero.”

Mr. Moini, who invests primarily in high-quality double-B- and single-B-rated junk bonds, cites the direction of default rates as part of his case for higher quality high yield debt.

High-yield default rates are now around 12.5%, which is almost three times the historical average, but current defaults don't reflect the effects of the increased liquidity.

Mr. Moini expects high-yield default rates to be near the historical average of 4.5% within six months.

“The default rate is a trailing number,” he said. “A lot of companies have gotten a lifeline and already refinanced their debt.”

Portfolio Manager Perspectives are regular interviews with some of the most respected and influential fund managers in the investment industry. For more information, please visit InvestmentNews.com/pmperspectives .

0
Comments

What do you think?

View comments

Recommended for you

Featured video

Events

How are broker-dealers helping 401(k) advisers adapt to a changing market?

Bryan Hodgens, co-head of LPL Financial's Retirement Partners group, says the industry is getting much better at connecting advisers to wealth management opportunities and helping scale their businesses.

Latest news & opinion

Social Security funding outlook improves slightly

Retirement reserves extended one year; disability fund by 20 years

IBD report: Another impressive year

Despite a stock market decline, revenue is up. And the streak isn't expected to end anytime soon.

IBDs with the most CFPs

How many of the more than 83,000 certified financial planners are employed by the big independent broker-dealers?

Richard Thaler wants to use 401(k)s to boost Social Security payments

The Nobel laureate wants to simplify drawing down retirement assets, which he thinks is 'way harder' than saving the money.

InvestmentNews announces 2019 Innovation Awards winners

Sheryl Garrett is this year's InvestmentNews Icon.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print