One in four BB rated US high-yield bonds to be upgraded in next 18 months
One in four high-yield bonds in the US with a BB rating could be upgraded in the next 18 months thanks to the supportive economic backdrop in the country, according to Ken Leech, CIO at Legg Mason affiliate Western Asset.
Leech, lead manager of the $9.6bn Legg Mason Western Asset Macro Opportunities Bond fund, said the positive outlook for growth in the US, coupled with the ongoing removal of stimulus and a gradual increase in interest rates, means that spread sectors continue to offer selected value for investors.
He said “rising star issues” could be upgraded over the next year and a half, offering opportunities in specific subsectors.
“Given current valuations, we are maintaining a very modest exposure to high- yield debt with a focus on rising star issues with the potential for a ratings upgrade to investment-grade,” he said.
“In total, we think one in four BB rated bonds could be upgraded in the next 18 months if our outlook proves broadly correct.”
Sectors Western Asset is focusing on include energy and financials.
“High-yield corporate bond spreads have moved through historical averages but we believe this is justified when considering both fundamental and technical factors,” Leech said.
“We therefore continue to own idiosyncratic risk in favoured subsectors and issuers.”
As well as opportunities in high-yield debt, where the fund has around 9% invested, Leech and the team at Western Asset are seeing continued opportunities in emerging market (EM) debt, despite the backdrop of rising US rates.
The fund has around 40 per cent of its assets in emerging markets including Brazil, Russia and Argentina.
“We remain constructive on EM debt and believe there is room for further spread compression versus developed markets,” he said.
“We are therefore positioned to benefit from potential risk premiums in select EM bonds by maintaining exposure to countries exhibiting positive fundamentals and cheap valuations.”