Valerio
Baselli:
Hello
and
welcome
to
Morningstar.
Rising
global
bond
yields
continue
to
channel
interest
and
demand
into
bond
funds.
In
such
a
landscape,
investors
hungry
for
income
also
look
at
high-yield
bonds.
But
what
is
the
outlook
for
this
asset
class
in
2024?
And
what
are
the
risks?
To
answer
those
questions,
today
I’m
joined
by
Tim
Crawmer,
Global
Credit
Strategist
at
Payden
&
Rygel.
So,
Tim,
high-yield
bonds
performed
very
well
in
2023.
Do
you
think
such
performance
will
be
difficult
to
replicate
in
2024?
And
overall,
what
is
your
outlook
for
the
short
to
medium
term?
Tim
Crawmer:
Sure.
In
2023,
we
saw
stellar
returns
in
global
high-yield
in
the
12%
to
13%
area
in
USD
terms.
That
kind
of
performance
is
going
to
be
extremely
hard
to
replicate
this
year.
However,
there
are
a
lot
of
good
things
going
on
within
global
high-yield.
Companies
have
very
strong
fundamentals
that
are
supported
by
strong
global
macroeconomic
conditions.
And
there
is
a
lot
of
demand
for
global
high-yield
bonds
right
now
that
is
outstripping
the
amount
of
supply
that
is
coming
to
market.
This
will
support
valuations
and
we
think
that
you
will
get
around
a
5%
to
7%
type
of
return
in
2024.
Baselli:
When
it
comes
to
high-yield
bonds,
of
course,
bond-picking
is
very
important.
What
is
your
investment
process
within
the
high-yield
fixed
income
universe?
And
where
do
you
see
the
best
opportunities
right
now?
Crawmer:
Sure.
In
the
global
high-yield
universe,
bond
picking,
as
you
pointed
out,
is
extremely
important.
Here
at
Payden,
we
pride
ourselves
on
doing
extensive
bottom-up
fundamental
analysis.
This
research
is
conducted
by
a
very
experienced
analyst
pool.
And
the
one
differentiating
factor
for
us
here
is
our
analysts
cover
their
sectors
on
a
global
basis.
So,
they
cover
US
high-yield
issuers,
European
high-yield
issuers,
and
emerging
market
high-yield
issuers
in
their
sectors.
This
allows
them
to
find
the
best
relative
value
opportunities
globally
for
our
investment
strategy.
And
currently
where
we’re
seeing
the
best
opportunities
is
in
the
banking
sector.
We
found
that
a
lot
of
the
subordinated
rated
securities
from
the
stronger
systemically
important
banks
globally
are
offering
valuations
that
are
attractive
versus
other
high-yield
issuers.
A
lot
of
that
is
due
to
the
fact
that
people
still
have
bad
memories
about
what
happened
with
Credit
Suisse
last
year.
And
that
has
kept
valuations
on
the
cheap
end,
but
we
see
opportunities
there
currently.
Baselli:
Interesting.
Finally,
what
are
the
main
risks
investors
need
to
be
aware
of
when
investing
in
high-yield
bonds,
especially
in
this
economic
environment?
Crawmer:
The
main
risks
that
we
see
out
there
is
the
fact
that
valuations
reflect
a
lot
of
the
good
news
currently.
So,
valuations
reflect
the
strong
positive
technicals,
the
strong
positive
fundamentals,
and
dispersion
is
relatively
low.
However,
borrowing
costs
have
gone
up
significantly
for
high-yield
issuers.
So,
this
is
going
to
have
a
negative
impact
on
issuers
because
their
cost
of
debt
has
gone
up
significantly.
Where
this
will
be
felt
the
most,
we
think,
is
in
the
lower-quality
part
of
the
high-yield
market.
Specifically
with
companies
that
have
over-levered
their
balance
sheets,
they
were
too
aggressive
borrowing
debt
with
the
expectation
that
rates
wouldn’t
go
up.
And
now
that
they
have,
they
will
have
to
face
a
reckoning
and
make
sure
that
they
can
address
those
higher
debt
costs.
So,
making
sure
we
avoid
those
names
is
paramount
for
our
strategy
going
forward.
Baselli:
Tim,
thank
you
so
much
for
your
time.
For
Morningstar,
I’m
Valerio
Baselli.
Thanks
for
watching.
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