Prudential's Peters says
risk-reward for junk bonds 'not favorable'
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[April 22, 2017]
By Jennifer Ablan
NEW YORK (Reuters) - PGIM Fixed Income
senior portfolio manager Greg Peters said on Thursday that he has been
reducing his overweight position in junk bonds because the "risk-reward
is just not favorable."
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.
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"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."
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![](../images/042217pics/busine91.jpg)
Greg Peters at the Reuters Global Investment Summit in New York,
November 17, 2015. REUTERS/Brendan McDermid
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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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