Investors should turn to speculative-grade debt amid a “world of minuscule yields” that is likely to persist, according to Jack Malvey, former chief global fixed-income strategist at Lehman Brothers Holdings Inc.
Investors pumped $1.1 billion into funds that specialize in high-yield, high-risk debt in the week through June 23, the most since March, according to EPFR Global, a research firm that tracks fund flows. The return on the Bank of America Merrill Lynch U.S. High Yield Master II Index is 1.67 percent this month, after a 3.52 percent loss in May.
“There’s been a pick-up in sentiment moving back into the high-yield space,” said Malvey, 58, in an interview on Bloomberg Radio’s “On the Economy With Tom Keene.”
“In investment-grade markets, unfortunately, there’s really no compelling outstanding yield advantage today,” Malvey said. “This is a world of minuscule yields and is unfortunately likely to stay over the course of the medium term.”
The movement to high-yield debt funds comes as Treasuries rally, with the yield on the 10-year note reaching the lowest level in over a year as concerns of a slow economic recovery prevailed following meetings among G-20 leaders.
In contrast to the concept that “greed is good” espoused by the character Gordon Gekko in the 1987 movie “Wall Street,” Malvey said, “it seems like the theme for the early part of the teens is ‘austerity is good.’
“In terms of running a Wall Street desk, it’s good news for government bond trading and swap trading in and around government securities because there’s a lot of action and activity,” said Malvey, now a consultant.
Junk debt is rated below Baa3 by Moody’s Investors Service and lower than BBB- by Standard & Poor’s. The Bank of America Merrill Lynch U.S. Corporate Master Index posted a 1.65 percent return for the current month.