(September 13, 2013) — Tapering, and the reasons behind it, might be about to create the perfect environment for credit investing, according to one fixed income manager.
“Tapering quantitative easing (QE) is happening because the policymakers see improvements to the economy. Fundamentally the better backdrop is good for credit,” said Mark Holman, CEO of Twenty Four Asset Management at its London investor conference.
“Notwithstanding this, central banks still have highly accommodative stances and remain prepared to act, which is supportive of a low default rate.”
This low default rate and a chance of further stimulus by central banks—highlighted in an earlier presentation by top Deutsche Bank strategist Jim Reid—would mean investors could have a surer footing in credit markets.
Despite the spectre of rising rates —the next step after tapering QE—Holman said “positively sloping, steep yield curves coupled with historically cheap credit spreads mean investors are being well paid to stay involved”.
And they should get in now, he said, acknowledging the company ran a credit fund, but illustrating how holding off for a year could see returns from the asset class slashed. He added that sovereign bonds and other fixed-income assets depending on interest rate duration were producing poor returns.
With credit spreads still high compared to pre-financial crisis levels, Holman’s view of default rates remaining low means credit remains attractive for investors. “In terms of credit spreads, our base case scenario is for a continuation of the reversion to mean, driven by fundamentally improving economic conditions. The default rate will remain low, supporting the case for high yield bonds.”
Related content: Why We’ve Not Seen the Back of QE (and Why We’re Not in Recovery Mode) & Is the ABS Market Making a Comeback?