London: Pilar Gomez-Bravo knows a thing or two about financial crises. She’d been a credit insider in one guise or another at Lehman Brothers for about a decade when the last one hit.
Today she’s a portfolio manager at MFS Investment Management, and sees eerie similarities between the current frenzy for risk and the speculative mania that made her cautious on the eve of the last bubble.
She’s selling junk bonds in a contrarian bet that the debt rally is on its last legs -- with the potential to trap funds with billions staked in levered and often illiquid assets.
“There’s an art to knowing when to leave the party," said the director of fixed income for Europe. “In fact it’s over -- people are desperate and they’re hunting down the after-party. We probably only have a few hours left."
Rallying corporate debt is defying growth fears sounded by government bonds and warnings that risky assets are priced for perfection.
Gomez-Bravo, who oversees $4.5 billion in fixed-income assets, is on the way out. She’s cut high-yield exposure to 10% from as high as 30% in 2016, in one of her unconstrained funds with 160 million euros ($179 million), which is up almost 10% over the past year.
Her cue to leave the party came a few weeks ago when average US high-yield bond spreads fell below 375 basis points, a level that in the past has signified negative excess returns in a year’s time. It’s the same threshold that turned famed credit bull Bob Michele of JPMorgan Asset Management into a bear last month.
From her vantage point managing a slew of global credit funds, she sees the long-bemoaned opacity and leverage of junk issuers now at a tipping point.
Over a third of private high-yield companies in Europe, for example, restrict access to financial data in some way, according to Bloomberg analysis earlier this year. Buyers should receive extra compensation for firms that curb access to earnings with password-protected sites, according to Gomez-Bravo.
Borrowers still have the upper hand in the US and Europe. Thank cheap-money policies and low defaults. Speculation the European Central Bank is preparing for another round of quantitative easing is spurring the rally -- and masking fragile balance sheets.
Yet leaving the party too early risks leaving profits on the table. Gomez-Bravo is selling into a rising market and taking more political risk by adding to investments in peripheral governments like Greece and Italy.
“There’s more risk than reward right now," she said. “There are real end-of-cycle fears about what performs."
When Lehman went bust, the mother of four was a portfolio manager at its investment arm. Prior to that, she was a senior credit analyst on Lehman’s sellside but moved in 2006 citing, she says, frustration with unchecked animal spirits.
Like even outspoken naysayers at the time, she didn’t anticipate the violence of the downturn. Still in May 2007, Gomez-Bravo became cautious on US risk and issued warnings on corporate health -- which bear echoes with the intense hunt for yield today.
“Everything was bid indiscriminately," she recalls. “I knew things were heating up; there were telltale signs. It’s always difficult to leave money on the table, but as a result we avoided the blow-ups."
This story has been published from a wire agency feed without modifications to the text. Only the headline has been changed.