Commodities remain hurdle for US high-yield

Added 24th May 2016

Carl Whitbeck, head of US high yield at Axa IM, expects the struggling commodities sector and ongoing uncertainty around future Fed action to lead to greater volatility in the high yield space.

Commodities remain hurdle for US high-yield

In a webcast Tuesday, Whitbeck estimated the US high-yield market was trending towards a 5% default rate up from 2%, driven by the poor performance of the energy, metals and mining sectors.

Recent data compiled by Moody’s and Goldman Sachs showed the commodities sector accounted for 14.6% of defaults between February 2011 and February 2016 compared with 3.4% of other high-yield bonds.   

Low exposure

One of the reasons Axa’s short-duration high yield fund generated positive returns in a negative market is because of the fund’s intentionally low exposure to the energy commodities sector, said Whitbeck.  

He admitted that he buys fewer issues in energy companies in general because it is an inherently volatile asset that doesn’t fit within the credit parameters of the his fund.

Instead, he said the short duration fund tends to be more overweight toward tech companies that historically have a lower rate of default.

Future Fed impact

Another potential factor of future market volatility is the impact the Fed will have on investor sentiment. While many are concerned by the Fed’s threats to raise interest rates over the summer, Whitbeck said we should be more concerned about the impact the Fed will have on spreads.

When asked about whether the outcome of the impending US presidential election would drastically impact the US high-yield bond market, Whitbeck said a Trump victory could spell changes in the healthcare and telecom sectors.

A Clinton victory would be unlikely to shake up the status quo in Whitbeck’s view. We would still be left with a democratic president and a republican majority house of representatives.  

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