For JPMorgan, Buying Junk Bonds Is the Debt Market Trump TradeBy
Asset manager with $1.8 trillion expects pro-business policies
Fund nearly tripled net exposure to high-yield since election
JPMorgan Asset Management is boosting its holdings of high-yield debt on the expectation that President Donald Trump’s policies will fuel domestic growth and improve corporate earnings, strengthening the balance sheets of junk-rated companies.
Following the election, the firm nearly tripled its exposure to junk bonds in its unconstrained debt fund, which permits shifts of that magnitude, and raised its exposure “meaningfully” across the board, according to Bob Michele, who oversees $470 billion as the chief investment officer and head of global fixed income, currency and commodities at the firm’s $1.8 trillion asset management arm.
“This is historically the largest move we’ve ever made,” he said in an interview.
The reallocation comes as many on Wall Street are sounding alarms that the junk bond rally has gone too far. The Bloomberg Barclays High Yield Index returned more than 17 percent in 2016 as yields fell steadily throughout the year -- and bullish sentiment since Nov. 8 has pushed them even lower. Strategists like Bank of America Corp.’s Michael Contopoulos have warned investors not to pile in to the crowded trade, especially as yields approach their all-time lows.
Michele derived his take on Trump from what he considered common themes in his campaign speeches, interviews, post-election statements and cabinet picks.
“When you listen to the rhetoric, its pro-business and pro-growth,” he said, pointing to Trump’s pledges of fiscal stimulus and deregulation as talking points that fit that mold.
In JPMorgan’s $2.8 billion unconstrained debt fund net high-yield exposure now stands at 35 percent. To reach that level, Michele not only added new junk-rated assets but also closed out all of his credit hedges, leaving in place only hedges on interest rate risk.
In addition to boosting its junk allocation after the election, JPMorgan revised its macro predictions more dramatically than ever before, Michele said. The firm raised its forecast for the probability of “above trend” growth to 65 percent from 10 percent and slashed its expectation for a recession to 5 percent from 25 percent.
The firm’s managers expect high-yield overall will likely return between 8 percent and 10 percent in 2017, Michele said. The average expectation on Wall Street is less ebullient, between 4 percent and 6 percent.
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