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Peters, who helps oversee more than $100 billion in multi-sector
fixed-income portfolios at PGIM Fixed Income, said after
high-yield's huge run-up late last year and into 2017, junk
bonds no longer offer ample value.
Even so, "I’m not bearish, per se, of high yield, but we have
taken it down" in our portfolios, Peters said.
He said the group is taking on a defensive posture and holding
on to double-B credits because they have "a really good carry
component to it."
Investment-grade investors who are reaching for yield buy the
double-B-level credits, while junk bond investors who no longer
want to hold triple-C credits in a weak market want to purchase
the double-B credits as well.
"So you have this kind of unique characteristic in the double-B
market that allows you to do well in lots of different cycles,"
Peters said.
Peters, the former Morgan Stanley chief global asset strategist
who sounded an early alarm about the 2008 financial crisis, said
he also is shorting German two-year bonds, also known as Schatz,
because they have become "really, really, really rich."
At the top of Peters' worry list is concern that Federal Reserve
policymakers would "hike us into recession," given the U.S.
central bank is looking to raise interest rates as well as
reduce its balance sheet.
This week, Boston Fed Bank President Eric Rosengren said winding
down the Federal Reserve's balance sheet, if started soon and
done very gradually, should not have much effect on the central
bank's plans to raise interest rates.
But Peters said the tightening cycle is in unchartered territory
because of "the challenge of never having to experience this
before."
(Reporting by Jennifer Ablan; editing by Bill Trott and Chizu
Nomiyama)
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