High yield default rates unlikely to rise, manager claims

High yield bond manager NN Investment Partners is taking a contrarian view to the market view that high default rates are coming, with large credit losses and weak returns.

Tim Dowling, lead portfolio manager, global high yield at NN Investment Partners, argued that many high yield bond managers are too pessimistic. “Currently, we think that many global high yield bond managers and strategists are using narratives from the past to construct an inappropriately gloomy view of the future. We believe the default rate will fall over the coming year, leading to solid returns as the market reprices for lower credit losses, and that investors should select mutual funds that are overweight credit risk to benefit from this dynamic.”

Dowling said that previous credit cycles in 1990, 2002 and 2008 ended when aggressive lending created market bubbles in particular sectors, savings and loans in 1990, telecoms in 2002 and property in 2008. However, he said that the energy sector would not follow this pattern, as the weakest issuers have already defaulted and lower energy prices would be good for most other sectors. Dowling commented: “The impact of lower defaults on global high yield performance could be powerful. Expectations of increasing defaults have pushed the price of the average global high yield bond below par, creating the conditions for good performance if our default forecast proves to be correct.”