Marathon Asset ‘Hates High Yield,’ COO Rabinowitz Says

Marathon Asset Management LP, a hedge-fund operator that manages about $10.5 billion, is betting prices will fall in the high-yield, high-risk bond market because interest rates and defaults probably will rise.

“We hate high-yield -- we’re actually short high-yield,” Andrew Rabinowitz, Marathon’s chief operating officer, said today on a panel at the Absolute Return Symposium 2014 in New York. “It’s trading at dangerous levels.”

Rabinowitz joins DoubleLine Capital LP’s Jeffrey Gundlach and Oaktree Capital Management LP’s Howard Marks in voicing concern that the junk-debt market is showing signs of froth. Speculative-grade bonds have returned 148 percent since the end of 2008 as five years of easy-money policies by central banks led investors to pour unprecedented amounts of money into the market.

With borrowing costs for the least-credit-worthy companies globally approaching the record low of 5.94 percent, junk bonds no longer provide enough of a buffer from rising Treasury yields as the Fed trims its stimulus, said Gundlach, whose DoubleLine Capital oversees $49 billion.

“They’ve squeezed all the toothpaste out of the tube,” the bond manager said this month in a telephone interview from Los Angeles. “There is interest-rate risk that’s just being masked by fund flows holding up the prices of junk bonds.”

The amount of high-yield securities worldwide tracked by a Bank of America Merrill Lynch index has ballooned to $1.97 trillion from less than $1 trillion in March 2009.

Loan Value

Steven Tananbaum, chief investment officer at GoldenTree Asset Management LP, also said today at the event in New York that it will be difficult to make much money on speculative-grade corporate debt. High-yield, or junk, debt is rated below Baa3 by Moody’s Investors Service and lower than BBB- by Standard & Poor’s.

“It’s going to be very hard to get more than 5 percent returns in high-yield or loans for the rest of the year,” said Tananbaum, who founded the $18 billion New York-based investment firm.

Floating-Rate Benefit

Still, loans offer “the best value relative to bonds in 15 years” because their interest payments are floating-rate, which offers protection against rising interest rates, he said.

David Sherr, the founder of One William Street Capital Management LP, said at the hedge-fund conference that while relative yields on junk bonds are “aggressive,” it may be difficult to make money shorting the debt because it may take time for yields to climb. Any spread widening would then be offset by the lower risk premiums associated with a closer maturity date, said Sherr, whose One William Street manages more than $2.5 billion.

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