Fixed IncomeMar 10 2014

‘Crowded trade’ in BB bonds pushes managers to up risk

Search sponsored by

Nick Gartside, manager of the JPMorgan Strategic Bond fund, maintained that high-yield bonds “still look attractive” in certain areas, even though he admitted the asset class has “more interest-rate sensitivity” at current levels.

He said he was selling Treasury futures to “strip away the interest-rate sensitivity” of high-yield holdings.

Lundie warns on rush for short duration

Fraser Lundie (pictured), co-head of credit at Hermes Fund Managers, has warned that investors could lose out on returns as issuers are increasingly reducing the period during which they are guaranteeing not to refinance their debt.

He referred to a “structural creep” as high demand for bonds with a shorter lifespan – which are less sensitive to movements in interest-rate expectations – had allowed issuers to reduce “call protection”.

“Call protection benefits investors in a rising rate environment and extends the period in which they can be exposed to the price gains of well-performing [bonds] – and therein lies the equity-like returns investors have come to expect,” Mr Lundie said.

“However, recent demand for short-duration debt, combined with an undersupply of new issuance, has allowed companies to bring forward the dates at which they can redeem bonds. Since 2010, non-call periods worldwide have almost halved from 6.8 years to 3.6 years.

“This [is] a sign that issuers are winning the power struggle with investors over terms and pricing.”