Nuveen's Higgins Says Credit Markets Are Frothy, Not Irrational

  • Default cycle has been extended, portfolio manager says
  • OppenheimerFunds’ Memani says investors should bet on loans

President Donald Trump’s calls to boost spending as well as continued consumer strength are helping extend the credit cycle, meaning current market valuations make sense, said Joe Higgins, a portfolio manager at Nuveen.

“Things are frothy, but it’s not irrational,” Higgins, who helps manage bond funds for TIAA’s asset manager, said Friday in a Bloomberg Television interview. With the promise of fiscal stimulus and the strength of corporate earnings and consumer spending, “the default cycle is going to be pushed off for a couple of years longer than it would’ve been. So defaults, one of the enemies of high-yield performance, that’s pushed off. It’s not illogical to bid strongly.”

Stocks have rallied since Trump’s victory as investors wager that he’ll cut regulation and increase infrastructure spending. Money managers including Bill Gross have said that U.S. Treasuries could be nearing a bear market if the yield on the 10-year bond approaches 2.6 percent. Higgins said, however, that the economy still has more room for growth, pushing off the risk of a recession.

Federal Reserve officials have been hinting that a rate increase could come as soon as this month, leading to speculation that policy makers might boost rates more frequently this year than previously forecast. Investors need to carefully scrutinize the Fed’s dot plot and listen to central bankers to figure out the path for increases this year and next, OppenheimerFunds Inc.’s Krishna Memani said Friday during the same interview.

‘Sleuthing’ Required

“The hike itself is a given,” said Memani, the asset-manager’s chief investment officer. For future rate increases, “it’s going to be a bit of sleuthing to do there because the risk is the fact that we see more than three potential hikes in 2017. If that’s the case, the bond market would have trouble dealing with that news.”

Investors might want to bet on senior floating-rate loans, Memani said. Though not cheap, those wagers are safer than junk debt while still providing good returns, he said.

“Loans are the best asset classes in credit,” Memani said. “They provide you a good amount of income with significantly lower level of risk, either in terms of prices going down or a potential default cycle leading to huge losses.”

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