Relative value still favours U.S. high yield – for now
For the moment, we feel that the marginal dollar of risk should still go to U.S. high yield bonds before it goes to emerging markets. Moreover, when I spoke at a conference with one of my emerging markets debt colleagues recently, he agreed that, while he saw many discrete opportunities in his own asset class, high yield was a more attractive risk-adjusted prospect. High yield spreads have since narrowed, but in my view that is still true.
The fundamentals can change, of course. My colleagues in emerging markets debt are certainly excited about Latin America, in particular, and while I’m not 100% persuaded yet, there’s no denying that part of the world bears watching closely.
The new administration in Buenos Aires is still very young. Likewise, the process in Brazil may take a long time to play out and the story can quickly turn upside down from the way markets currently read it—as emblematic of some of the headwinds that emerging markets still face. Nonetheless, once it’s clear that the political scene really is changing in this region, turning those headwinds into tailwinds, the yields on offer could present some very interesting opportunities.
