Following the the troubled Greek bailout negotiations, some investors have taken it as a sign that the time has come to up their European sovereign debt allocations opportunistically.
Nick Gartside, fixed income CIO at JP Morgan Asset Management, said he is far more positive on the high-yield space however.
“Year-to-date, 10-year German bunds are up 30 basis points, whereas European high-yield is up about 20 basis points,” he expanded. “While government bond yields are a little bit more than high-yield bonds over the year, the difference is in the valuation.”
“Five-year German bunds are at 16 basis points [on 12 June], while the equivalent maturity in European high-yield is 4.3%. High-yield may be riskier – they are ‘junk’ bonds – but that extra yield easily compensates you for the risk of default, which in our view remains very low.”
“The underlying European backdrop is improving economic growth and companies in pretty good shape, so when you add those two together default rates should stay low. So, notwithstanding the recent rise in government bond yields, there is a far better opportunity in high-yield,” he added.
Money where your mouth is
Gartside’s conviction is backed by his JPM Global Bond Opportunities Fund portfolio, with European high-yield accounting for 15% of the holdings.
It is a weighting that Gartside has held for a while, and even considering the IMF and ECB seemingly losing patience with Greece, he is sanguine on the prospects of a Greek exit from the eurozone and the opportunities that could be presented to sovereign investors, preferring to stick with high-yield.
“We do own some European sovereign bonds, but only Spain and Italy,” he said. “From here on out our bias is to add more European high-yield, which is one of our top trades.
“The Greece negotiation is about brinksmanship. Many deadlines have come and gone, and I am sure there will be more – it is all politics, and as far as negotiations go is not out of the ordinary.”
