While noting “spooked” high yield debt investors are fretting about a fresh credit crisis in the face of the expected Federal Reserve interest rate hike tomorrow, he cautioned that it would be a mistake to flee the sector.
“Heightened concerns sparked last week were emblematic of exactly why we’ve been preaching for years about the transient nature of market liquidity and the importance of not being fully invested,” Eigen said. “In today’s market it is more important than ever for bond fund managers to have the flexibility to seek out value as well as meet redemptions without the need to sell into a falling market.”
Eigen added that a “hallmark” of the strategy employed in his JP Morgan Income Opportunities Fund since inception has been to act as a provider of liquidity in periods of market stress, hence he has maintained a 30% cash balance in recent months.
“History suggests that adding to risk during uncomfortable time periods has led to strong risk adjusted results in the long run,” Eigen continued. “That’s why we are still very positive on the return prospects for high yield debt over the longer term, despite the current turmoil. In fact, we think the high yield selloff is overdone for the most part, primarily due to weak liquidity driven by large retail outflows, sector specific weaknesses, the expectation the Fed will raise rates this week and weak year-end risk appetite.”
In Eigen’s view, US high yield fundamentals, aside from the lower quality commodities names, continue to remain sound with healthy balance sheets, extended maturity profiles, low anticipated defaults, trend growth in the US, and a US consumer that should benefit from the collapse in energy prices.
