NEW YORK (Reuters) – The gains in high-yield junk bonds are not over, thanks to the Federal Reserve’s supportive stance on monetary policy, Margaret Patel, one of the mutual-fund industry’s longest tenured and most well-known bond managers, said on Tuesday.
“The risk-taker will be rewarded,” Patel, a senior portfolio manager at Wells Fargo Asset Management, said at the New York headquarters of Reuters. The ICE Merrill Lynch U.S. high-yield index has posted returns of 8.92% so far this year. Patel’s Wells Fargo High Yield Bond fund is up 8.68% for the same period.
“I see a downward drift in yields in junk bonds,” she said.
Patel, who has more than 40 years’ experience in the business, said the Fed will not be cutting off liquidity and could, in fact, slash interest rates this year. The Fed’s potential cuts will trigger another wave of gains and access to credit for high-yield companies, which issue debt with less-than-stellar credit ratings called junk bonds.
“Why should junk bond spreads be 450 basis points over Treasuries if defaults are a needle in a haystack? Makes no sense,” Patel said.
The economy is slowing down but not to the point of recessionary levels, Patel said. She characterizes the economic backdrop as marked by “low inflation, modest growth, low interest rates and low volatility.”
As a result, junk bond returns will continue to be modest for a number of years, Patel said. She favors the industrial, healthcare and technology sectors.
For their part, U.S. equities “could definitely move higher,” she added.
After starting as an equities analyst, Patel eventually became a portfolio manager where her reputation rose primarily on the bond side. Before joining Pioneer Investments in 1999, Patel had started a bond fund for Third Avenue’s fund family. It was later acquired by the Boston asset manager.
Reporting by Jennifer Ablan in New York; Editing by Matthew Lewis