Investors allocating record amounts of funds into corporate credit “are setting the stage” for a situation in which they’re not paid for the risk they’re taking, said Boaz Weinstein, founder of hedge fund Saba Capital.
“I wouldn’t call it a bubble,” Weinstein said today at the Bloomberg Markets Hedge Fund Summit. “We’re halfway there.”
High-yield, high-risk debt prices soared to 99.6 cents on the dollar as of yesterday from a low of 54.78 cents in December 2008, according to Bank of America Merrill Lynch index data. Prices rose to 99.67 cents on April 30, the highest since June 2007, as the number of companies defaulting on their debt declined in an economic recovery.
“The credit market remains incredibly bullish,” Weinstein said. “There’s only one way it can go.”
One of the biggest changes in credit markets since the crisis struck is the lack of demand for structured products from bond insurers such as MBIA Inc. and Ambac Financial Group Inc., said Andrew Feldstein, chief executive officer and co-founder of hedge fund BlueMountain Capital Management LLC.
“Most if not all of the risk takers have been materially reduced if not eliminated,” Feldstein said. With that demand gone, it’s hard to imagine a sustainable tightening of credit spreads in the market, he said.
Weinstein said that if another credit crisis occurs “natural sellers of protection” may be hard to find.
MBIA, the world’s largest bond insurer, was stripped of its top financial-guarantee credit ratings in 2008 as claims on securities backed by mortgages and home-equity loans surged. The company was sued by shareholders in 2008. Ambac said last month it has “insufficient capital” to finance itself past the second quarter of 2011 and may need to seek bankruptcy protection.