While recent weeks have seen a surge of doom and gloom forecasts involving the US credit market, including dire assessments that a “death spiral” in credit ETFs may have begun following the recent blowout in both investment grade and high yield spreads…
… at least one fund is seeing a shiny silver lining amid the carnage.
According to AXA Investment Managers. corporate bonds have fallen so hard they’re officially in a bear market, which is great news for funds eager to dip their toes and BTFD, such as AXA which believes we have seen a “potential trough and buying opportunity in the ruins.”
“The market is trading with more attractive valuations than for most of the post-crisis period,” said Chris Iggo, AXA’s CIO for fixed income who manages over $500 billion in assets.
In a note on Monday, Iggo writes that “for anyone that is relatively optimistic that the U.S. will avoid a really nasty slowdown and that inflation will generally remain well behaved, then the time is getting closer to add to bonds.” And, like all other chronic buyt-the-dippers, Iggo predicts that after their dismal performance in 2018, dollar bonds “should race ahead next year.”
Unless of course, the Fed has already tightened into a recession, and keeps hiking rates for the foreseeable future as vice chair Clarida suggested earlier today.
Echoing the warning from Morgan Stanley over the weekend, in which the bank asked “how many idiosyncratic problems before we conclude that the issues in credit are not one off”…
… Iggo notes that issuer-specific risks are starting to look widespread, and that “given where we are in the economic cycle and given the increase in funding costs, especially in the U.S., it’s safe to say we are in something of a credit bear market.”
But the reason why the AXA manager remains optimistic and recommends not ruling out the asset class just yet, Iggo believes that the economy is running not too hot or cold, where fundamentals may be “deteriorating” but “still positive on the whole.”
That analysis would have cost Iggo dearly at the start of the year because as Bloomberg notes, his is a glass-half-full take in a punishing year, with U.S. high-grade bonds down almost 4% in 2018.
But Iggo is confident that the rout is (almost) over, and calculates that debt prices have fallen so far that U.S. IG credit spreads would have to widen 20bps for a long position to underperform government bonds; yields would have to spike by more than 65 basis points to deliver a negative outright return, he estimates.
Still, as usual “bottom fishing” remains a virtually impossible taks, and as Iggo admits, finding the trough is the hard part given the “glorious chaos” gripping markets.
With Brexit, trade tensions, Italy’s battle with the European Union, a Chinese slowdown, and volatility weighing on global markets, it’s likely corporate bonds will cheapen further before prices reach a bottom, he said.
“It could get worse before it gets better but even today the entry point for credit is better than it has been for some time, an important consideration for investors with new money to invest or those with allocations out of equity markets,” Iggo said, hoping that greater fools will listen and jump in, helping him offload his book.
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