Why one junk bond bear is steering clear of the asset class

The notes have rallied but strategist says high-yield is not attractive.

Junk bonds are beating less risky debt almost everywhere in 2024, but a Vontobel Holding AG strategist says he’s steering clear of the asset class.

Bets the US economy will break with historical precedent and avoid a recession despite the Federal Reserve’s high borrowing costs have spurred a rally in high-yield corporate notes. Bloomberg’s global speculative grade credit index has returned 1.3% so far this year. With defaults expected to decline, several fund managers have said they see the good performance continuing.

“For me, the four most expensive words in markets are ‘this time it’s different,’” said Christopher Koslowski, a senior fixed-income strategist at Vontobel Asset Management’s multi-asset group. The least attractive “place I want to be is in high yield.”

Koslowski favors Treasuries over credit in the belief that the Fed will have to cut interest rates later this year when the economy starts to lose momentum. Chair Jerome Powell last week suggested the Fed is getting close to the confidence it needs to start lowering them from their two-decade high.

Koslowski concedes that if the US labor market doesn’t weaken significantly in coming months “the window for a recession will close.” Still, that doesn’t make him a fan of riskier corporate debt at current prices.

“Everybody’s drinking from the punch bowl,” he said. “If you look at corporates in general from a valuation perspective, they’re terribly unattractive.”