Earlier today, Peter Acciavatti, J.P. Morgan's head of High Yield Strategy gave a presentation at JPM's 2010 US Fixed Income Outlook Conference. Some key take-aways from the call:
- High yield and leveraged loans remain attractive with solid expected returns. He pointed to a slide a ~12% expected return for high yield and a ~13.5% expected return on leveraged loans.
- These returns are driven by spread tightening, modestly offset on the high yield side of the world by the treasury curve widening (bank debt is floating and hence would not be negatively affected by rising rates)
- In the high yield market, demand has modestly outpaced supply. In loans, demand is dramatically higher than supply due to limited levered loan issuance this year.
We face two possible states of the world. One is a world in which our economic problems are largely solved, profits are on the mend, and things will soon be back to normal, except for a lot of unemployed people whose fate is, let's face it, of no concern to Wall Street. The other is a world that has enjoyed a brief intermission prior to a terrific second act in which an even larger share of credit losses will be taken, and in which the range of policy choices will be more restricted because we've already issued more government liabilities than a banana republic, and will steeply debase our currency if we do it again. It is not at all clear that the recent data have removed any uncertainty as to which world we are in.