Fortress Mentality Clouds Credit Outlook
You’ve got to admire Peter Briger’s honesty.
Briger, co-chairman of Fortress Investment Group, is so unhappy with the current state of credit markets that he’s prepared to give investors their cash back rather than try to find something worthwhile to buy. Why? Because the credit-investing landscape is just that bleak right now.
"We are in a period of time where the opportunity set is low," Briger said on an earnings call Thursday. "We’re really trying not to make marginal mediocre investments."
It's easy to see why the $70 billion asset manager is having a hard time getting excited about riskier debt markets right now. Prices are high. Yields are low. Companies are becoming less creditworthy. Uncertainty abounds.
Recently, investors have demonstrated a bout of fear, yanking about $4 billion from U.S. high-yield bond funds in the past week, the most so far this year. This may be largely due to jitters tied to the upcoming U.S. election, which takes place on Nov. 8. But once the election is over, there's a good chance lower-rated corporate bonds will continue to decline.
Here are three reasons why:
1) Many opportunistic buyers aren't interested in buying the debt at such high prices. Fortress is a good example of this. Briger's most positive comment in the firm's earnings call was predicting another downturn, which could lead to some deals.
"I guess the best that can be said is that the seeds of the next great opportunity are being planted now," he said. Fortress isn't alone: KKR is selling distressed debt it purchased earlier in the year to lock in gains, and behemoths like Oaktree and Bain Capital are saving up cash to deploy in a slump.
2) One of the biggest drivers of this year's gains has been energy junk bonds. But that trade appears to be coming to an end. Oil prices have plunged more than 13 percent in less than three weeks, bringing down speculative-grade debt of energy companies with them.
3) Meanwhile, bond traders are starting to believe in inflation again. So are Fed members, who said this week that the pace of price increases "has increased somewhat since earlier this year." As if to hammer home the point, Friday's U.S. jobs report showed that wages rose from a year earlier by the most since June 2009.
Why does this matter for riskier corporate credit? The more investors believe in inflation, the less they'll be willing to park their money in government bonds that provide less income than the rate that consumer prices are rising. That means that borrowing costs will probably rise on more highly-rated debt, with those notes attracting investors who are currently taking bigger risks on lower-grade credit.
While many traders are blaming political uncertainty for the latest selloff in riskier credit, there are fundamental reasons for this debt to continue deteriorating. Don't be surprised if it does just that through the end of the year.
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