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US HY SPREADS TOO TIGHT TO TEMPT BUYERS

Fund managers are shying away from allocating major capital to the U.S. high-yield bond market as the premium investors receive for taking on added risk lurks near historic lows.

U.S. asset manager Federated Hermes is taking an underweight position on domestic high-yield bonds within its multi-sector funds as the tight spreads offer little compensation, Katie Glass, the co-head of the domestic high-yield group, told the Reuters Global Markets Forum.

"To be constructive in the high yield market, you have to assume that credit conditions are more benign than history. We don't believe that given all of the geopolitical situations that we're facing, which are leading to inflationary pressures. You're just not getting compensated for (the) risk," said Glass.

Spreads on the ICE BofA US High Yield Index hit a year-to-date high of 346 basis points at the end of March as the U.S.-Israeli war on Iran intensified. They have since pulled back to the mid-200s.

The war in the Middle East has sent Brent crude futures soaring to their four-year high of $126 per barrel, risking a renewed spike in global inflation and growing concerns for a higher-for-longer global interest rate environment.

Glass said, even if the war caught investors off guard, "it wasn't enough of a spread-widening event to cause us to re-evaluate our underweight to the market."

She added that a move back to the mid- to high-300s alongside stable economic data would prompt a fresh look at redeploying into the market.

Until then, the firm - managing roughly $11.3 billion in global high yield - is staying selective, favoring lower-risk segments with stable free cash flow and issuers built to weather a full market cycle.

(Join GMF on LSEG Messenger for live interviews: https://lseg.group/3MG6UMi)

(Ankita Yadav)

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