“Everyone is so mindful of bond markets that they have almost a cautiously optimistic view, but some of that optimism is being held back by their concern.
“I am not saying that no one should be worried about liquidity. However, it is the antithesis of ‘a market with no concern is the most dangerous’ – if no one was worried about it then it would be a problem, but everyone is so obsessed with it that a liquidity shock would be an extraordinary event.”
It seems that the camps are clearly divided on high yield prospects, but Richard Woolnough, manager of the M&G Optimal Income Fund, believes that there other opportunities out there.
Speaking on the Brewin Dolphin Podcast, Woolnough said that given the current economic backdrop, US credit is where he is finding openings.
“You want to invest in systems which are efficient and transparent, which from both a credit and government bond perspective sits in the US,” he said. “The system is benefitting from globalisation and will continue to be strong – the economy can weather a small increase in interest rates.
“Our credit exposure is predominantly in the US. There has been a huge supply increase during the past year, and companies are looking to lock in long-term financing. Whereas people are saying that there is not enough liquidity in markets, in the US there is almost too much liquidity. Because of that supply prices have widened, and we are finding some opportunities in long-term tech, media and telecoms (TMT).”
Fixed income is facing a tri-pronged attack from rate hikes, illiquidity and a redemptions rush, but it is clear that, at least for some, high yield looks more like a potential saviour than a victim.
