Allianz, Gundlach Call Time Out on the Decade-Long Boom for Euro Junk-Bonds

The good times may be nearing an end for the best-performing asset class since the global financial crisis.

European high-yield bonds have hit “wack-o season,” Jeffrey Gundlach, chief executive officer of DoubleLine Capital, said in a tweet last week. The $110 billion investment manager is paring risk, he said in an interview. Allianz Global Investors and Brandywine Global Investment Management are similarly cutting euro junk-note allocations.

Gundlach cited the vanishing premium that investors demand to hold euro high-yield debt instead of U.S. Treasuries as the reason for his alarm. Bondholders in Europe have also become readier to accept weaker protections as they struggle to find yield in a debt market warped by central-bank buying and record-low interest rates.

The junk appetite means a Bloomberg Barclays index of euro high-yield bonds has returned 4.5 percent this year, even after a sell-off last week amid rising tensions between the U.S. and North Korea. The notes returned 100 percent in dollar terms in the decade that began on the day that the global financial crisis erupted.

Allianz Global Investors, which manages about $586 billion, has begun trimming its euro high-yield exposure because record valuations make the notes particularly vulnerable in a wider selloff, said David Newman, the company’s head of global high yield. Still, the European Central Bank will probably provide support if there is a market wobble, he said. 

Research company CreditSights is more optimistic about euro junk bonds, highlighting a plunge in default rates. A strengthening euro-area economy also means the rate will likely stay below 1 percent next year, it said.

Brandywine shares the economic confidence and is betting on the euro. Even so, the $72 billion investment company has cut euro junk-bond allocations to a seven-year low because of valuation concerns, said Regina Borromeo, its head of international high yield.

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