Mike Snyder, senior v.p. and high-yield portfolio manager, Alliance Capital Management

 

Mike Snyder , senior v.p. and high-yield portfolio manager, Alliance Capital Management

What sectors do you think will outperform this year, and why?

There's a real lack of dispersion in terms of sector yields and discounts. It will be different from last year where telecom, utilities and cable were at a significant discount and had disproportionately high yields. The market has rallied so much in the lower-quality portion and people took more credit risk. This year, nothing will stand out as exceptional value. The average yield for any one sector looks clustered. No sector has enough of a yield differential to really outperform. We may see variation if a sector gets hit hard with a sector-specific problem. For instance, healthcare may underperform based on legislative and policy changes, or wireless issues such as number portability may result in changing credits. But, based on the relations of the yields in all sectors, nothing stands out as being that attractive.

 

How will higher interest rates affect the technical outlook? Will issuers come to market as often and, if not, will this reduction in supply be positive for outstanding spreads?

We've seen a lot of concern about rates going higher and there's been a lot of action in the new issue market. There is good liquidity in the market and there's going to be a lot of pressure on interest rates. Because of this pressure, companies have refinanced higher coupon bonds that they issued four or five years ago and reissued at much lower interest rates. That will continue to drive supply, which is fine as long as there is demand on the other side. For high yields, there will be demand. High yield will be the least impacted by rising rates.

 

Will less supply put attention back on the secondary market and, if so, how do you expect liquidity to be?

That's a coin toss. As long as demand holds up, there will be supply. Last year was a near record year with $140 billion in new issue supply, which was more than offset by enough demand. As long as demand stays balanced, that shouldn't have an impact on the secondary market. But, pressure on the secondary market may occur when you see outflows and if the calendar stays robust.

 

With the economy improving, a lot of investors are beginning to move down the credit ladder. Are there any red flags out there? What should bondholders be on the lookout for as they take on increasing levels of risk?

Typically there's a lack of discipline in the market where you start seeing more highly levered transactions than what we've seen. Dealers are pushing the edge. We've seen four times debt to cash flow and even five to six times. We've seen dealers that start pushing more aggressive terms. They have looser covenants, worse call protection and more volatility. Or, they simply aren't creditworthy. Bondholders should be aware of these factors.