Kumar isn’t alone. Money managers overseeing about $1.1 trillion have said in the recent past that they are cutting exposure to the asset class. High-yield bonds typically respond more violently than other assets to market shocks because investors tend to cut the riskiest bets first.
“There’s a chance that a bubble in European high yield could burst quite quickly and a lot of people could panic,” said Kumar, who helps oversee 10 billion pounds ($13 billion). “That’s where you’ve got low liquidity, low visibility and greater investor propensity to panic.”
Down Risk Ladder
Christian Hille, Deutsche Asset Management’s global head of multi-asset, doesn’t think that fixed income is in a bubble zone. But if risk appetite continues to grow at the current pace, a bubble could easily form in the leveraged-credit space as investors are “forced to go down the risk ladder.”
“We’ve been in one of the longest expansionary periods in postwar history,” Hille said. “That, combined with asset-price inflation, poses a potential risk. It doesn’t mean that we are seeing that risk now, but there’s a potential black swan there.”
Mario Draghi said on Thursday that the ECB doesn’t see any signs of an increase in leverage, the “component of a bubble” that accompanied the period prior to the global financial crisis.
Made In China
Like many investors before him, Legal & General Investment Management’s John Roe sees China as the biggest threat. Concerns about the country’s debt pile have ebbed and flowed in the past few years as investors try to grasp how much control the country’s leadership has on capital flows.
Stabilizing economic growth this year has helped allay most, but not all, concerns. Kevin Smith, the Denver-based founder of Crescat Capital, said last month the yuan could sink 70 percent over the next 12 months as the credit bubble bursts.
“That’s the one as a team that we talk about the most,” said Roe, head of multi-asset funds at Legal & General in London. “If the outflows from China run up again it becomes a real concern.”