BlackRock leads as major investors cut exposure to risky credit as spreads hit historic lows

Big investors are backing off riskier credit after a record run that left debt markets looking stretched. BlackRock, M&G, and Fidelity International are all cutting exposure to lower-rated corporate bonds, moving into safer assets as US credit spreads shrink to near crisis-era lows, according to the Financial ￰0￱ retreat comes amid growing fear that years of easy gains could unravel fast if global growth ￰1￱ problem is simple: the reward for taking risk has nearly ￰2￱ spreads (the extra yield investors earn on corporate bonds over government debt) have fallen to about 0.8 percentage points, down from 1.5 points in ￰3￱ Riddell, a fund manager at Fidelity International, said “credit spreads are so tight that there’s almost no ability for them to tighten further.” He warned that if anything shakes markets, “spreads can widen substantially.” Fidelity now holds a short position against developed market credit, a defensive bet that profits if riskier bonds drop, said ￰4￱ adds caution as rally stretches thin At BlackRock , Simon Blundell, co-head of European active fixed income, said “relentless tightening” has pushed the world’s largest asset manager to buy safer, higher-rated and shorter-dated ￰5￱ called the current setup a “Goldilocks scenario” built on expectations of steady US growth and rate cuts by the Federal Reserve, but one that offers poor risk/reward ￰6￱ tightening has become so extreme that in some cases, credit spreads have turned negative, meaning investors are getting paid less for holding riskier debt than for owning government ￰7￱ say this is justified by stronger company balance sheets and confidence that Donald Trump’s White House will keep policy supportive while the Fed delivers four more quarter-point rate cuts by the end of next ￰8￱ even that optimism is fading ￰9￱ have already begun to widen slightly after US-China trade tensions resurfaced and auto-parts supplier First Brands Group collapsed, rattling sentiment across the credit ￰10￱ Niven, who runs the £6.4 billion F&C Investment Trust, said his team recently cut its position in credit to “neutral,” dumping high-yield bonds because “the asymmetry in terms of cost compared to government bonds is getting expensive.” It’s a clear signal that money managers no longer see value in stretching for ￰11￱ retreat from risky loans and weaker issuers The caution is spreading beyond ￰12￱ leveraged loans have been pulled in recent weeks as buyers walked away.

A $5.8 billion deal from chemicals producer Nouryon and another worth over $1 billion from drugmaker Mallinckrodt were both ￰13￱ existing loans have also dropped in price as traders flee to safer assets, and hedge funds are steering clear of shaky ￰14￱ Seminara, chief investment officer at London-based Redhedge, said, “Not only is the corporate credit market way too tight, it’s also equivalently tight between ￰15￱ is lots of idiosyncratic risk which is completely unpriced.” That’s trader-speak for warning that too many investors are ignoring differences in company ￰16￱ the jitters, not everyone is abandoning credit ￰17￱ Lord, a manager at M&G Investments, said, “Corporate bond yields are attractive and deserve to be owned now.” The overall yield on corporate bonds received by investors, known as the “all-in yield”, is still seen as attractive by many, due to rises in government bond yields in recent ￰18￱ yield to maturity on US investment grade bonds is around 4.8%, according to data from NYSE’s ￰19￱ so, Ben said M&G is rotating into covered bonds issued by life insurers and higher-rated corporate credit, calling the “cost of switching out of BBB-rated unsecured bonds and buying these as low as it’s ever been.” Don’t just read crypto ￰20￱ ￰21￱ to our newsletter.

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