TDAM manager turns cautious on high-yield bonds

Amid narrowing spreads, non-investment-grade credits are expensive, Greg Kocik says.

Michael Ryval 20 July, 2017 | 5:00PM

With high-yield-bond spreads over U.S. Treasuries approaching relatively low levels, and uncertainty about the Federal Reserve's plans to start the process of unloading trillions of dollars of bonds from its balance sheet this fall, Greg Kocik argues that it is a time to adopt a conservative stance.

"Clearly, the market is much more expensive than a year ago, after a very strong rally," says Kocik, managing director at Toronto-based TD Asset Management Inc. (TDAM), and lead manager of the $1.2-billion TD High Yield Bond. "But the question is: Where are we in the cycle, and is the current spread of 395 basis points (bps) comparable to where the market was trading, say, 10 years ago, just before the financial crisis?" In July 2007, spreads were 250 bps, an all-time low. That suggests, Kocik notes, that there is some cushion in the current spread.

On a positive note, Kocik adds, there is less interest-rate sensitivity in high-yield bonds as the effective duration has slipped to about four years, from 4.4 years in June 2007. As for the quality of bonds, the average credit rating, B-plus, has not changed in a decade.

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Michael Ryval

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