Tim Dowling, head of Credit Investments and lead portfolio manager Global High Yield at ING IM, says interest rates are key for high yield investors this year.
Although spreads tightened solidly in 2013, they are far from the historic tights reached in prior cycles. Our outlook is that interest rates will ascend mildly and that spreads tighten, leading to an expected full year performance near the market yield. We think the primary cause of volatility will be investors thinking that accelerating US growth will lead the Fed to increase policy rates, but see these concerns as already expressed by the very steep interest rate curve.
We remain confident that the Fed Funds target rate will remain near zero as the continuing weakness in the broader employment metrics illustrate that there is little chance of quickly accelerating inflation. As the interest rate curve has become very steep, we only expect modest increases in treasury bond yields.
On the company level, we think conditions are quite positive. Defaults have been very low, and we do not expect them to accelerate soon. New issue quality has been deteriorating very slowly, and the market remains much more conservative than in the period of 2005 to 2008. We are very focused on divining the signals that the credit market is about to turn negative, and we are still seeing many good, classic issuers to buy into. We think issuance will be high, giving us more opportunities to perform through security selection.