This is a dangerous time for the US high yield market, which has been artificially boosted by years of easy money, fund managers warn.
According to Ariel Bezalel, manager of the Jupiter Strategic Bond Fund, years of very low interest rates have been a policy error and added: “The decision to hike in December suggests to us that the Fed is looking to atone for its failure to begin normalising monetary policy earlier in the cycle, before the imbalances in the global financial system became so pronounced. In our view, the Fed should have started raising rates several years ago, before its actions had created a massive misallocation of capital and bubbles across many asset classes.”
As a result, she feels that US high yield issuers could now be at risk from further rate rises. “Our impression from recent company meetings is that many US businesses are highly leveraged. These ‘zombie’ companies have been kept alive by the Fed’s zero interest rate policy. As soon as the Fed signalled its desire to bring this policy to an end, credit markets began to react,” Bezalel said. While European high yield was a less mature market and in better shape, idiosyncratic risk was a factor for investors. Bezalel added: “The other big risk to credit has been liquidity. Due to regulatory reasons investment banks simply cannot support the markets as well as they did in the past.”