Tuesday, November 21, 2017 - 13:53

Portfolios:BTS Waiting For Overdue Stock Selloff To Reenter HY

By Yali N'Diaye

OTTAWA (MNI) - The U.S. high yield market is exhibiting signs of weakening that have BTS Asset Management CEO Matthew Pasts on the defensive.

However, as the portfolio manager still has a constructive view on the sector, supported by strong fundamentals and a benign default trend outlook, he is looking for the next entry point into high yield that could well be triggered by a stock market correction, which is "overdue" and generally occurs about every 12 months.

BTS Bond Asset Allocation portfolios move funds between high yield corporate bonds, U.S. government bonds, and the money market based on quantitative signals. Currently, funds are in the money market, reflecting a defensive stance in light of increased volatility, outflows from high yield into investment grade bond funds, as well tight spreads.

"The best scenario for us would be that the stock market sells off," with yield spreads widening quickly, said Pasts, for whom 2018 will definitely be a "carry trade for high yield," provided there is an attractive entry point.

Failure to pass a U.S. tax reform lowering taxes for corporations in particular could be a trigger.

It could also come from inflation data, a resurgence of which could spark expectations of a more aggressive Federal Reserve and ultimately a rise of the 10-year yield, currently around 2.37%, to 2.6% with a spread widening.

"It's a real risk," Prasts said.

Overall, he estimates that a spread widening event "to more realistic valuations" has a "strong probability" of happening over the next several weeks or couple of months.

So rather than resulting from a deteriorating default outlook, a spread widening would reflect a normalization of high yield valuations, and would thus bring back buying interest.

The interest from investors in high yield is indeed still there, the portfolio manager said, noting that most participants see a "very healthy high yield market," a view that he shares.

He sees support from a stronger GDP growth and a "robust low default rate environment."

But high yield spreads need to widen for the funds to be moved out of money markets and back into high yield.

--MNI Ottawa Bureau; +1 613 869-0916; email:

[TOPICS: M$C$$$,M$U$$$]

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