Payden & Rygel: Opportunities in Global High-Yield Bonds
Payden & Rygel: Opportunities in Global High-Yield Bonds
Tim Crawmer, a director and global credit strategist at the asset management firm Payden & Rygel, recently discussed opportunities investors might find in global high yield bonds.
What are your expectations for the Global High Yield sector in 2024? What is the demand from clients?
Tim Crawmer: In 2023, we saw stellar returns in global high yield in the 12% to 13% area in USD terms. That kind of performance is going to be extremely hard to replicate this year. However, there are a lot of good things going on within global high yield. Companies have very strong fundamentals that are supported by strong global macroeconomic conditions. And there is a lot of demand for global high-yield bonds right now that is outstripping the amount of supply that is coming to market. This will support valuations and we think that you will get around a 5% to 7% type of return in 2024.
What is your investment process?
Crawmer: In the global high-yield universe, bond picking is extremely important. Here at Payden, we pride ourselves on doing extensive bottom-up fundamental analysis. This research is conducted by a very experienced analyst pool. And the one differentiating factor for us is our analysts cover their sectors on a global basis. So, they cover US high-yield issuers, European high-yield issuers, and emerging market high-yield issuers in their sectors. This allows them to find the best relative value opportunities globally for our investment strategy.
Where do you see the best opportunities for investments?
Crawmer: Currently we're seeing the best opportunities in the banking sector. We found that a lot of the subordinated rated securities from the stronger systemically important banks globally are offering valuations that are attractive versus other non-bank high-yield issuers. A lot of that is because people still have bad memories about what happened with Credit Suisse last year. And that has kept valuations on the cheap end, and we see opportunities there currently.
What risks do you see in the market at this time?
Crawmer: The main risks that we see out there is the fact that valuations reflect a lot of the good news currently. Valuations reflect the strong positive technicals, the strong positive fundamentals, and dispersion is relatively low. However, borrowing costs have gone up significantly for high-yield issuers. So, this is going to have a negative impact on issuers because their cost of debt has gone up significantly. Where this will be felt the most, we think, is in the lower-quality part of the high-yield market. Specifically with companies that have over-levered their balance sheets, and were too aggressive borrowing debt with the expectation that rates wouldn't go up. Now they could face a reckoning if they are not prepared to address those higher debt costs. So, making sure we avoid those names is paramount for our strategy going forward.