Junk bond exchange-traded funds have been seeing an influx of cash since the last Fed meeting, amid signals from Chair Jerome Powell and other officials that the hiking cycle may be at its end. High-yield funds have seen cash inflows of $7 billion in November, reversing months of heavy outflows.
Recessions have historically caused corporate spreads to widen, but bulls remain confident amid strong earnings. Additionally, some are betting that even if an economic contraction materializes, it will be a shallow one that doesn’t lead to a big spike in defaults.
That’s the case for Geof Marshall, portfolio manager at CI Global Asset Management in Toronto. He says junk-rated credits are in solid shape financially and loaded with less leverage, making them better prepared to weather a potential downturn.
“We’re getting a big flashing green light on yield and price in the high-yield market,” said Marshall. “Defaults in the next downturn might peak at 4%. The numbers suggest that the US will go through a shorter and shallower recession, and we’re coming into it with better quality now in the high-yield bond market than ever.”
This article was provided by Bloomberg News.