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Brian Chappatta

Goldman Sachs Is Either Mad or Brilliant on Junk Bonds

No investor wants to touch the riskiest high-yield debt. The bank’s asset manager says it’s cheap enough that there are opportunities.

Cuts against the grain.

Cuts against the grain.

Photographer: Nicky Loh/Bloomberg 

In markets, a theme can often become the overwhelming consensus. When that happens, traders feel two conflicting urges at the same time. The first is to say the majority is wrong and stake a contrarian position. The other is to wonder whether maybe everyone is onto something.

This captures the current struggle for investors in the U.S. high-yield and leveraged loan markets. The consensus opinion is perhaps best stated by this Bloomberg News headline from last week: “Leveraged Loan Buyers Are Running for Cover as Fear Ramps Up.” Simply put, money managers are flocking into debt with higher credit ratings because they’re worried about how riskier securities will hold up if economic growth slows and their weak investor protections are put to the test. Already, big price moves are roiling certain pockets of the credit markets with greater frequency. That’s pushed the gap between prices on single-B and double-B rated leveraged loans, as well as the spread between triple-C and double-B junk bond yields, to the widest levels since mid-2016.