(Bloomberg) — DoubleLine Capital has its lowest-ever allocations to speculative-grade bonds now, because valuations just don’t reflect the risks.
The money manager has been gradually cutting its high-yield bonds and other sub-investment-grade debt over the past two years, Jeffrey Gundlach, chief executive officer, said at the Bloomberg Global Credit Forum in Los Angeles this week. There are myriad risks, including inflation and tariffs, and investors aren’t getting paid for them, he said.
Spreads, or risk premiums, on US high-yield notes are around 3 percentage points now, according to Bloomberg index data. That’s well below the two-decade average of 4.9 percentage points, and close to the lowest levels since 2007. At some point, there will be a selloff and it will make sense to go bargain hunting, Gundlach said.
“We want to be a liquidity provider when you get paid to be a liquidity provider — and you’re not now,” he said. “Spreads are very uninteresting in the credit market.”
Gundlach is one of a series of market watchers who have expressed worries about nosebleed valuations in corporate debt. Jamie Dimon said this week that he wouldn’t be buying credit now if he were a fund manager, echoing comments he made last month. Sixth Street Partners co-founder Josh Easterly has also voiced concern.
These concerns are largely being shrugged off in credit markets. Valuations are high because so many investors are eager to buy now, demand that has helped new issues for high-grade US corporate bonds this year garner nearly four times as many orders as there have been bonds for sale.
But still there are ample signs of trouble ahead. Last month, more debt from blue-chip companies was downgraded than upgraded, the first time that’s happened since December 2023, according to JPMorgan credit strategists Eric Beinstein and Nathaniel Rosenbaum. Corporate cash levels are falling at blue chip US companies. And Israel’s attacks on Iran late this week could potentially spiral into a bigger regional conflict, pushing up oil prices, and boosting inflation.
By the start of next month, around $50 billion of debt will have fallen out of high-grade indexes this year due to ratings cuts, whereas only $8 billion have joined thanks to upgrades, the starkest disparity since 2020. Warner Bros. Discovery Inc. was cut below investment-grade by Moody’s Ratings this week following the media company’s decision to split in two. It’s the fifth-largest fallen angel ever, according to JPMorgan strategists, based on debt falling out of their high-grade index.
And corporate debt investors are showing at least some signs of growing more cautious. Returns on CCC bonds, the riskiest of junk debt, are lagging those of B and BB rated notes, suggesting increasing worries over the prospect of defaults.
“We’re of the opinion that there’s still some risks in the marketplace, that there’s still unresolved issues here,” said Adam Abbas, head of fixed income at Harris Associates. “The market may at least inject some more bouts of volatility in the future, and we need to be cognizant of that despite our fundamental view that everything structurally in credit is going to be OK.”
–With assistance from Lisa Abramowicz.
More stories like this are available on bloomberg.com
