(Bloomberg) -- The worst day of the year for junk bonds rattled credit-investor confidence as risk assets suffered in sympathy with slumping Treasuries and stocks. But most portfolio managers don't expect much more of a selloff.
The high-yield pain was most easily spotted in exchange-traded funds, the biggest of which dropped to the lowest since March.
"JNK chart looks like death. No way to win here, folks," DoubleLine Capital CIO Jeffrey Gundlach tweeted. JNK is the ticker for the SPDR Bloomberg Barclays High Yield Bond ETF, one of the biggest high-yield exchange traded funds.
The Markit CDX North America High Yield Index fell 0.43 percent as of 3:11 p.m. in New York.
High-yield investors blamed Treasuries' drop to a four-year low for the move, which follows credit-spread tightening to levels not seen since the financial crisis.
“In a world where your 10-year is pushing 3 percent, it's hard to have high-yield trading at 5.5" percent, said Randall Parrish, senior portfolio manager at Voya Investment Management LLC, which oversees $230 billion. “It's not like we're afraid of credit -- spreads aren't really going wider.”
The arguments in support of junk bonds have not changed, investors say. They include positive earnings, steady U.S. economic growth and stable commodity prices. However, some of the external drivers may not be as strong.
"We still think fundamentals are on sound footing," said Ken Monaghan, co-head of high yield at Amundi Pioneer, with $53.7 billion in assets.
Fading Tailwinds
"The tailwinds we've had in the last few years, in terms of mutual-fund inflows, in terms of central bank support, in terms of generous valuations, we do think that a lot of those are fading," said Neil Sutherland, a portfolio manager at Schroders, which has $135.2 billion of assets in its global fixed-income funds. "We would be a lot less optimistic on credit products than we have been over the last three or four years."
"We're not seeing corporate defaults, they're at all-time lows," said Kevin Giddis, head of fixed-income capital markets at Raymond James & Associates. "Until we start to see some cracks like that, it's still an attractive trade," Giddis, referring to high-yield credit, said on Bloomberg TV.
Those who anticipate spreads widening don't expect a significant move.
"We're not surprised that we would see a modest reversal because of the sharp drop in spreads we've seen since the beginning of the year," said Collin Martin, a fixed-income strategist at Charles Schwab Corp. "We could see spreads rise a little bit this year but we don't see this as the end of the credit cycle. We're not anticipating a sharp, steep selloff."
Less Value
"There's still a pretty good chance you earn your coupon," said Eric Stein, co-director of global income at Eaton Vance Corp., said on Bloomberg TV. "Certainly there's not as much value in the credit markets as you had a year or so ago."
For others, the move was a reminder of junk-bond vulnerability as the credit cycle extends a multi-year run.
"As we get further into this late stage of the economic cycle, we're going to have more and more of these types of situations," said Jody Lurie, corporate credit analyst at Janney Montgomery Scott LLC. "We've seen a couple of indications that the environment we've gotten used to is changing, but I don't know if those are enough to spur a complete shift in mentality just yet."
To contact the reporters on this story: Daniel Flatley in Washington at dflatley1@bloomberg.net, Molly Smith in New York at msmith604@bloomberg.net.
To contact the editors responsible for this story: James Crombie at jcrombie8@bloomberg.net, Nikolaj Gammeltoft at ngammeltoft@bloomberg.net, Kenneth Pringle, Rick Green
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