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Big Fund Managers Shun Neediest Junk-Bond Issuers, Echoing Fed

Cecile Gutscher

(Bloomberg) -- Some of the biggest fund managers see the start of a crushing wave of credit downgrades and defaults that threatens to overwhelm heroic measures by the Federal Reserve.

JPMorgan Asset Management has pared back exposure to high-yield in its Global Bond Opportunities fund to the lowest levels since its inception some seven years ago. BlueBay Asset Management says the biggest risk premiums in a decade built into the market may still not be enough while the global downturn takes hold.

“The reality is it’s probably pricing in the sort of defaults you’d expect in a recession but spreads can go wider and overshoot like we saw in the financial crisis,” Iain Stealey, JPMorgan Asset’s international CIO of fixed income, said in an interview. The fund, which had $5.7 billion at the end of February, is managed by Stealey and Bob Michele.

The assumption is junk-rated issuers will struggle to honor debts and that a growing number of high-grade companies will soon join their ranks.

Ford Motor Co. Wednesday became the largest fallen angel to date when it lost its investment-grade status from S&P Global Ratings. Marks & Spencer Plc, a retailer ubiquitous on British high streets, was similarly relegated on Thursday.

Read more: Ford Becomes Largest Fallen Angel After S&P’s Cut to Junk

The Fed’s life-buoy to keep companies afloat during the spreading pandemic -- the most far-reaching quantitative program it’s ever embarked upon -- doesn’t directly reach high-yield issuers. That’s allowed some of the widest gulfs between the haves and have-nots in corporate credit in a decade to persist.

World of Distress

JPMorgan turned bearish on junk bonds in June of last year, citing a fragile economic cycle and yields that didn’t pay enough for the risk of default.

Michele said in an interview with Bloomberg TV at the time he was ready to sell when spreads hit 370 basis points.

Now, the average spread in that index is above 1,000 basis points, plunging America’s junk bond universe into distressed territory, according to a common rule of thumb.

And risk premiums may rise even more as the coronavirus spurs an unprecedented collapse in consumer demand and investment.

“In my view, spreads at these distressed levels reflect the huge uncertainty around the depth and duration of the recession and consequent rise in high yield defaults as well as a meaningful liquidity premium,” said David Riley, chief investment strategist at BlueBay Asset Management in London. “Until investors are more confident in sizing the quantum of the jump in credit risk from the crisis, cheap assets can get cheaper.”

(Adds context on JPMorgan’s bearish call.)

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