Markets

Lisa Abramowicz is a Bloomberg Gadfly columnist covering the debt markets. She has written about debt markets for Bloomberg News since 2010.

It’s easy to hate this bond market. But burning hatred doesn't make much money when assets are still being propped up by central banks.

So big investment firms are becoming more creative, targeting more subtle, company-specific victories -- singles, if you will -- rather than swinging for the fences on macro themes.

For Michael Buchanan, deputy chief investment officer of Western Asset Management Co., that means going back to the time-consuming practice of scrutinizing individual companies and betting on their futures. Specifically, his team has been trying to identify borrowers that have a good chance of being upgraded to investment grade from high yield.

"There's just a very large number of these that our research team has identified," Buchanan said in a Bloomberg Radio interview on Friday. Some specific names he mentioned included Hanesbrands Inc., Park Aerospace Holdings and Freeport-McMoRan Inc. (Among his various roles, Buchanan is a member of the management team overseeing the $1.4 billion Western Asset Total Return Unconstrained Fund, which has performed better than 99 percent of its peers over the past year, according to data compiled by Bloomberg.)

It looks as if Western Asset may not be entirely alone in this wager on so-called rising stars in the bond world. Investors have piled into top-rated junk notes at a disproportionate pace this year, leaving those notes paying near the lowest extra yield compared with the lowest-ranked investment-grade debt since before the credit crisis.

Shrinking Margin
Investors are demanding less and less yield to own BB rated bonds compared with those those rated BBB
Source: Bank of America Merrill Lynch index data

Another way to look at this bet is to examine debt of companies that have been downgraded from investment grade to junk. These often have a better chance of regaining their top ratings because they tend to be bigger corporations with more stable businesses. These so-called fallen angels have been vastly outperforming their peers this year, gaining 6.8 percent compared with 5.4 percent for a broader U.S. high-yield bond market index.

Shining Bonds
So-called fallen angels have been substantially outperforming the broader high yield market
Source: Bank of America Merrill Lynch index data

Of course, it's much easier to just say "we like high-yield bonds" or "we hate stocks" than it is to analyze specific companies. It takes teams of researchers, and each wager has a smaller potential payoff because these aren't always giant corporations with tremendous amounts of debt outstanding.

But this is not a time of easy investment gains. Stock and bond valuations are high around the world. Central bankers are still buying bonds and keeping benchmark rates historically low, propping up markets and training investors to buy every dip.

At this point, small victories are the new big victories. Every little bit of extra return counts.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lisa Abramowicz in New York at labramowicz@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net