Morningstar
RecommendedSign Up to Our Newsletters Open Window IconMorningstar's Guide to Investing in Stocks Arrow Right
Special Report

The Best Opportunities in Global High Yield Bonds

Income Investing Special: Last year's stellar returns will be hard to match but there are still very positive aspects to the market, Payden & Rygel’s Tim Crawmer says

Valerio Baselli 21 May, 2024 | 10:29AM
Facebook Twitter LinkedIn
Font-Size

 

 

Valerio Baselli: Hello and welcome to Morningstar. Rising global bond yields continue to channel interest and demand into bond funds. In such a landscape, investors hungry for income also look at high-yield bonds. But what is the outlook for this asset class in 2024? And what are the risks? To answer those questions, today I'm joined by Tim Crawmer, Global Credit Strategist at Payden & Rygel.

So, Tim, high-yield bonds performed very well in 2023. Do you think such performance will be difficult to replicate in 2024? And overall, what is your outlook for the short to medium term?

Tim Crawmer: Sure. In 2023, we saw stellar returns in global high-yield in the 12% to 13% area in USD terms. That kind of performance is going to be extremely hard to replicate this year. However, there are a lot of good things going on within global high-yield. Companies have very strong fundamentals that are supported by strong global macroeconomic conditions. And there is a lot of demand for global high-yield bonds right now that is outstripping the amount of supply that is coming to market. This will support valuations and we think that you will get around a 5% to 7% type of return in 2024.

Baselli: When it comes to high-yield bonds, of course, bond-picking is very important. What is your investment process within the high-yield fixed income universe? And where do you see the best opportunities right now?

Crawmer: Sure. In the global high-yield universe, bond picking, as you pointed out, is extremely important. Here at Payden, we pride ourselves on doing extensive bottom-up fundamental analysis. This research is conducted by a very experienced analyst pool. And the one differentiating factor for us here is our analysts cover their sectors on a global basis. So, they cover US high-yield issuers, European high-yield issuers, and emerging market high-yield issuers in their sectors. This allows them to find the best relative value opportunities globally for our investment strategy.

And currently where we're seeing the best opportunities is in the banking sector. We found that a lot of the subordinated rated securities from the stronger systemically important banks globally are offering valuations that are attractive versus other high-yield issuers. A lot of that is due to the fact that people still have bad memories about what happened with Credit Suisse last year. And that has kept valuations on the cheap end, but we see opportunities there currently.

Baselli: Interesting. Finally, what are the main risks investors need to be aware of when investing in high-yield bonds, especially in this economic environment?

Crawmer: The main risks that we see out there is the fact that valuations reflect a lot of the good news currently. So, valuations reflect the strong positive technicals, the strong positive fundamentals, and dispersion is relatively low. However, borrowing costs have gone up significantly for high-yield issuers. So, this is going to have a negative impact on issuers because their cost of debt has gone up significantly. Where this will be felt the most, we think, is in the lower-quality part of the high-yield market. Specifically with companies that have over-levered their balance sheets, they were too aggressive borrowing debt with the expectation that rates wouldn't go up. And now that they have, they will have to face a reckoning and make sure that they can address those higher debt costs. So, making sure we avoid those names is paramount for our strategy going forward.

Baselli: Tim, thank you so much for your time. For Morningstar, I'm Valerio Baselli. Thanks for watching.

For more Income Investing Coverage

Subscribe to Our Newsletter

TAGS

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Facebook Twitter LinkedIn
Font-Size

About Author

Valerio Baselli

Valerio Baselli  is Senior International Editor at Morningstar.

© Copyright 2024 Morningstar, Inc. All rights reserved.

Terms of Use        Privacy Policy        Modern Slavery Statement        Cookie Settings        Disclosures

The Morningstar Star Rating for Stocks is assigned based on an analyst's estimate of a stocks fair value. It is projection/opinion and not a statement of fact. Morningstar assigns star ratings based on an analyst’s estimate of a stock's fair value. Four components drive the Star Rating: (1) our assessment of the firm’s economic moat, (2) our estimate of the stock’s fair value, (3) our uncertainty around that fair value estimate and (4) the current market price. This process culminates in a single-point star rating that is updated daily. A 5-star represents a belief that the stock is a good value at its current price; a 1-star stock isn't. If our base-case assumptions are true the market price will converge on our fair value estimate over time, generally within three years. Investments in securities are subject to market and other risks. Past performance of a security may or may not be sustained in future and is no indication of future performance. For detail information about the Morningstar Star Rating for Stocks, please visit here

Quantitative Fair Value Estimate represents Morningstar’s estimate of the per share dollar amount that a company’s equity is worth today. The Quantitative Fair Value Estimate is based on a statistical model derived from the Fair Value Estimate Morningstar’s equity analysts assign to companies which includes a financial forecast of the company. The Quantitative Fair Value Estimate is calculated daily. It is a projection/opinion and not a statement of fact. Investments in securities are subject to market and other risks. Past performance of a security may or may not be sustained in future and is no indication of future performance. For detail information about the Quantiative Fair Value Estimate, please visit here

The Morningstar Medalist Rating is the summary expression of Morningstar’s forward-looking analysis of investment strategies as offered via specific vehicles using a rating scale of Gold, Silver, Bronze, Neutral, and Negative. The Medalist Ratings indicate which investments Morningstar believes are likely to outperform a relevant index or peer group average on a risk-adjusted basis over time. Investment products are evaluated on three key pillars (People, Parent, and Process) which, when coupled with a fee assessment, forms the basis for Morningstar’s conviction in those products’ investment merits and determines the Medalist Rating they’re assigned. Pillar ratings take the form of Low, Below Average, Average, Above Average, and High. Pillars may be evaluated via an analyst’s qualitative assessment (either directly to a vehicle the analyst covers or indirectly when the pillar ratings of a covered vehicle are mapped to a related uncovered vehicle) or using algorithmic techniques. Vehicles are sorted by their expected performance into rating groups defined by their Morningstar Category and their active or passive status. When analysts directly cover a vehicle, they assign the three pillar ratings based on their qualitative assessment, subject to the oversight of the Analyst Rating Committee, and monitor and reevaluate them at least every 14 months. When the vehicles are covered either indirectly by analysts or by algorithm, the ratings are assigned monthly. For more detailed information about these ratings, including their methodology, please go to here

The Morningstar Medalist Ratings are not statements of fact, nor are they credit or risk ratings. The Morningstar Medalist Rating (i) should not be used as the sole basis in evaluating an investment product, (ii) involves unknown risks and uncertainties which may cause expectations not to occur or to differ significantly from what was expected, (iii) are not guaranteed to be based on complete or accurate assumptions or models when determined algorithmically, (iv) involve the risk that the return target will not be met due to such things as unforeseen changes in changes in management, technology, economic development, interest rate development, operating and/or material costs, competitive pressure, supervisory law, exchange rate, tax rates, exchange rate changes, and/or changes in political and social conditions, and (v) should not be considered an offer or solicitation to buy or sell the investment product. A change in the fundamental factors underlying the Morningstar Medalist Rating can mean that the rating is subsequently no longer accurate.

For information on the historical Morningstar Medalist Rating for any managed investment Morningstar covers, please contact your local Morningstar office.

For more detailed information about conflicts of interest, including EU MAR disclosures, please see the “Morningstar Medalist Rating Analyst Conflict of Interest & Other Disclosures for EMEA”here

Select Your Site Edition To make sure the site is relevant to you, we need to know if you’re an individual investor or a financial professional.