High yield bonds, CLOs top menu for 2013, says veteran
11 December 2012
By Hui Ching-hoo
US-based asset manager Neuberger Berman considers high yield (HY) bonds and collateralised loan obligations (CLOs) preferable choices in 2013 in view of expected sluggish US economic growth and low interest rates.
Neuberger Berman’s managing director Daniel Doyle tells Asia Asset Management that they forecast the return on HY bonds to stand between 6% and 9% in 2013, mainly stemming from the 6.5% coupon clipping, plus return on principal stemming from slow economic growth.
“We are looking at a lower than normal default rate of around 2%, against the historical default rate of around 4%-plus,” says Mr. Doyle. “We’re comfortable with this because maturities are very low, having been pushed out to 2018 thanks to the refinancing of HY bond and bank loan markets in the previous four years.”
Mr. Doyle expects GDP growth to linger somewhere between 1- 2%.
On the bank loan front, Mr. Doyle forecasts yields at 5% to 8% in terms of coupon plus return. Such solid returns are mainly attributable to the healthy issuance calendar, with new issues of HY bond and bank loans expected to total US$500 billion in 2013.
Meanwhile, CLOs are finally returning to favour, having suffered four years in the dog house following their devastating contribution to the global financial crisis (GFC). Approximately $45 billion of CLO deals have been priced this year. Improved structures have turned views on the CLO market around, says Mr. Doyle, who expects there to be around $60 billion to $70 billion of new issuance in the coming year.
Mr. Doyle says that the US ten-year treasury yield will rise to around 2% next year. Compared to other fixed income assets, such as investment grade bonds, HY bonds are less sensitive to rate hikes. As such, they will perform well in the forecast environment of marginal interest rate gains.
He revealed that the HY bond fund is mainly structured toward US HY, plus up to 3% exposure to Europe. It has a 15-year history of outperforming the benchmark index, switching from low-quality to high-quality bonds during periods of market volatility.
Although total returns on HY bonds reached 13%-14% this year, the trend is unlikely to carry through to 2013 as spreads have been tightening significantly, he says.
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