High-yield strategists and investors are split over whether portfolio managers should continue to increase credit risk in their portfolios, as they have done in recent weeks. Spreads between single-B credits and higher-rated double-Bs were at a record 505 basis points on Oct.5, but had narrowed to 335 basis points last Monday. Walter McGuire, global high-yield strategist at Deutsche Banc Securities, expects that gap to narrow another 10 basis points by year-end, but he says investors should move even further down the credit ladder, adding some triple-C rated names to their portfolios. McGuire projects credits yielding 20-30% (which include a number of triple-Cs) will return 5% over the next two months.
But, Gordon Massie, head of high-yield at AIG Global Investment Corp. in Houston, says he still shies from adding many single-B names, as he is concerned that the economy will not revive until the second half of next year. As a result, AIG has sold some of its single-B credits, including the Telewest 9.875% notes of '10, and the Nextel Communications 9.375%s of '09 (B1/B).
Greg Dube, head of high-yield at Alliance Capital in New York, recommends a credit barbell. He says that double-Bs should increase in value as they are popular with crossover investors (those who buy both lower-rated investment-grade credits and higher-rated junk). However, he sees more value in low single-B and some triple-C credits.