Mackenzie Minute: August 18, 2017
Steve Locke, Head of the Mackenzie Fixed Income Team, looks at the tight pricing in the high yield market and the impact of narrowing spreads.
STEVE LOCKE: Well, recent events, there’s been a couple to speak of but let’s look at the backdrop first, which has been, over the first half of this year, very low volatility around risky assets like high yield bonds and equities. But over the last couple of months we’ve seen geopolitical tensions rising, particularly between the U.S. and, say, North Korea. We’ve also seen central bankers sound a little bit more hawkish at the margin with a little bit of upward pressure on yield curves over the last two months.
One of the areas to focus on immediately, here in August, is with the upcoming Jackson Hole Symposium with a global collection of central bankers meeting in Jackson Hole, Wyoming. Often times, we can hear some changes in policy rhetoric coming out of that [meeting] so that’s something to keep our eye on.
Over the next few months one of the areas of most interest to us is the high yield market where we are seeing extremely tight pricing of high yield bonds with spreads having tightened quite a bit over the last six months. So areas in that market are getting expensive and we’re watchful for changes in valuation there.
We’re most keenly aware of the impacts that high yield bonds can have on our mandates and, certainly, with that spread narrowing we’ve seen, that’s caused us to reduce our high yield holdings in the most expensive bonds out there in the market. Over half of the market is trading with a yield of less than 5% so we want to be very careful about our selections. We’ve reduced our allocation to high yield, including in our new high yield mandates, in favour of loans and other investment-grade corporate debt that we find to be fair or cheaply valued in this market.