A global fund manager has expressed its support for portfolio allocations to corporate and high-yield bonds in light of government and central bank economic responses to the COVID-19 pandemic.
“The commitment from policymakers is to ensure that there is the combination of fiscal and monetary policy to get through [the pandemic], so if all that policy is designed to return things back to normal [economically and] generate growth back to where it was pre-crisis, that’s not something I want to fight and I want to be in parts of the market that will benefit from that,” JP Morgan head of the fixed income, currency and commodities group Robert Michele said.
“It is the corporate bond market, both investment grade and high yield.”
Michele acknowledged there are certain industries that have suffered more than others from the government reactions to COVID-19, but was adamant this should not dampen investor enthusiasm for these two types of fixed income instruments.
“There are lots of [sectors] being battered and even our expectation is you could see default rates in US high yield go to 10 per cent. But where that market is priced, and net of recoveries, that means something like 94 per cent of the value of the high-yield market should return its principal,” he noted.
“Meaning that almost everything you look at except for a couple of sectors, which are well noted, should be money good given the amount of policy response there is.
“If you combine that with the investment-grade market, you’re looking at close to 99 per cent of the credit markets that should be fine.”
According to Michele, investing in emerging market fixed income can also be attractive, but again the countries with the most favourable opportunities are dependent on their fiscal and monetary coronavirus responses.
“What are they doing on the monetary side? Are they cutting rates? Do they have the ability to go in and support their own bond market?” he said.
“And then also critical is [their] access to some of the IMF (International Monetary Fund) funding programs. Do they qualify [and] can they be backstopped?”
Specifically, he identified India and Indonesia as markets currently delivering very high real yields.