US high yield bonds are seeing an increase in default rate forecasts. With government bonds continu...
US high yield bonds are seeing an increase in default rate forecasts.
With government bonds continuing to perform well, the high-yield end of the market looks unattractive, says Ian Dixon, fixed income fund manager at Henderson Investors. He says: "The whole category as an entire sector is being avoided to cut our risk."
Mark Sanders, fixed interest fund manager at Aberdeen, says he has avoided the high yield end of the US bond market for some time. He says: "We've been wary for the past few months simply because there are a lot of pricing pressures and over 3,000 companies in the US high yield sector. It has not been a great performer over the past two to three years relative to equities."
Sanders says default rate projections for the US high yield bond market are one reason for reticence. He says: "Moody's has a forward-looking projection of 8.3% by October 2001, and the current default rate is 4.91%."
Sanders adds this is the highest default rate in recent years, although one must treat these figures with caution.
He says: "DLJ say it's closer to a 4% default rate, but you can get into semantics over rates. In theory they are over a year, but it is a rolling 12 month rate, so it can jump up."
The underlying state of the US economy is obviously impacting negatively upon the high yield bond market, observes Roger Webb, fixed income fund manager at Morley Fund Management.
He says: "There is an indication that the economy is slowing, and higher interest rates mean a company's ability to raise funds is probably less than in recent years. There is less liquidity in the market now. The proportion of distressed high yield bonds is increasing and the number of profits downgrades versus upgrades is also on the way up."
The telecom sector has struggled year to date, and Dixon attributes a lot of the high yield bond market malaise to that.
He says: "The default rate has been pushed higher by the bottoming of telecoms. Investors feel they are being asked to provide cash for a wide range of different areas and there is a scarcity of capital."
Dixon believes the woes of the telecom sector are spreading throughout the market. He adds: "It's an industry gone or going through transition and it has followed the Nasdaq. The Nasdaq is struggling to find who will be the winners and losers and it is the same with the bond market."
Webb agrees the telecom sector will feature quite strongly in defaults year to date, but believes no one sector is really dominating defaults. Last year, he adds, one could pick out energy as a sector likely to default but this year the market is more fragmented.
Sanders agrees, saying retail has had one of the worst default rates over the past few years. Pricing pressures and deflationary concerns are hitting old economy stocks harder as they look to increase volumes rather than prices in a bid to stave off decreasing profit margins.
He points to Sunbeam as an example, with investors concerned the consumer goods manufacturer could default soon.
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