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May 03, 2017 at 12:25 PM
(Bloomberg Gadfly) — In recent years, whenever U.S. credit markets have become mired in boredom and melted up out of sheer habit, traders start worrying about junk bond bubbles.
Now is no different. It has been a notably unremarkable year for credit traders despite populist upheavals in Europe and the U.S. and subsequent unpredictable policies and rhetoric. Meanwhile, yields have fallen to 5.2%, from more than 10% last year, with average prices rising back above 100 cents on the dollar from last year’s low of 83.6 cents, according to Bloomberg and Bank of America Merrill Lynch index data.
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So now here come big investment managers, including Guggenheim Partners and Pictet Asset Management, publicly worrying about seemingly frothy U.S. company debt markets.
Scott Minerd of Guggenheim highlighted his credit concerns on Monday at the Milken Institute Global Conference in Beverly Hills, California.
“One of the things we’ve been doing is trying to lean against it a little bit with our clients,” he said of the hot credit markets. “To get them to understand that we’re late in economic expansion, credit spreads are extremely tight, especially in high-grade corporate debt and high yield.” Peter Tchir, head of macro strategy at Brean Capital, also recently recommended investors sell their high-yield debt holdings, especially via index funds that in his view are poised to underperform more significantly.
It’s hard to be too wrong. This debt is overvalued by any historic measure, especially when juxtaposed with a credit cycle that’s exhausting itself. Companies are adding debt faster than they’re increasing revenues. And as BlackRock’s Larry Fink noted recently, the U.S. economy is slowing down, not speeding up.
So there very well may be a cooling off period in the near term.
