PGIM Fixed Income senior portfolio manager Greg Peters said on Thursday that he has been reducing his overweight position in junk bonds because the “risk-reward is just not favorable.”
Peters, who helps oversee more than $100 billion in multi-sector fixed-income portfolios at PGIM Fixed Income, said after high-yield’s huge run-up late last year and into 2017, junk bonds no longer offer ample value.
Even so, “I’m not bearish, per se, of high yield, but we have taken it down” in our portfolios, Peters said.
He said the group is taking on a defensive posture and holding on to double-B credits because they have “a really good carry component to it.”
Investment-grade investors who are reaching for yield buy the double-B-level credits, while junk bond investors who no longer want to hold triple-C credits in a weak market want to purchase the double-B credits as well.
“So you have this kind of unique characteristic in the double-B market that allows you to do well in lots of different cycles,” Peters said.
Peters, the former Morgan Stanley chief global asset strategist who sounded an early alarm about the 2008 financial crisis, said he also is shorting German two-year bonds, also known as Schatz, because they have become “really, really, really rich.”
At the top of Peters’ worry list is concern that Federal Reserve policymakers would “hike us into recession,” given the U.S. central bank is looking to raise interest rates as well as reduce its balance sheet.
This week, Boston Fed Bank President Eric Rosengren said winding down the Federal Reserve’s balance sheet, if started soon and done very gradually, should not have much effect on the central bank’s plans to raise interest rates.
But Peters said the tightening cycle is in unchartered territory because of “the challenge of never having to experience this before.”
(Reporting by Jennifer Ablan; editing by Bill Trott and Chizu Nomiyama)