Portfolios:BTS Waiting For Overdue Stock Selloff To Reenter HY

By Yali N'Diaye

     OTTAWA (MNI) - The U.S. high yield market is exhibiting signs of weakening

that have BTS Asset Management CEO Matthew Pasts on the defensive.

     However, as the portfolio manager still has a constructive view on the

sector, supported by strong fundamentals and a benign default trend outlook, he

is looking for the next entry point into high yield that could well be triggered

by a stock market correction, which is "overdue" and generally occurs about

every 12 months.

     BTS Bond Asset Allocation portfolios move funds between high yield

corporate bonds, U.S. government bonds, and the money market based on

quantitative signals. Currently, funds are in the money market, reflecting a

defensive stance in light of increased volatility, outflows from high yield into

investment grade bond funds, as well tight spreads.

     "The best scenario for us would be that the stock market sells off," with

yield spreads widening quickly, said Pasts, for whom 2018 will definitely be a

"carry trade for high yield," provided there is an attractive entry point.

     Failure to pass a U.S. tax reform lowering taxes for corporations in

particular could be a trigger.

     It could also come from inflation data, a resurgence of which could spark

expectations of a more aggressive Federal Reserve and ultimately a rise of the

10-year yield, currently around 2.37%, to 2.6% with a spread widening.

     "It's a real risk," Prasts said.

     Overall, he estimates that a spread widening event "to more realistic

valuations" has a "strong probability" of happening over the next several weeks

or couple of months.

     So rather than resulting from a deteriorating default outlook, a spread

widening would reflect a normalization of high yield valuations, and would thus

bring back buying interest.

     The interest from investors in high yield is indeed still there, the

portfolio manager said, noting that most participants see a "very healthy high

yield market," a view that he shares.

     He sees support from a stronger GDP growth and a "robust low default rate

environment."

     But high yield spreads need to widen for the funds to be moved out of money

markets and back into high yield.

--MNI Ottawa Bureau; +1 613 869-0916; email: yali.ndiaye@marketnews.com

[TOPICS: M$C$$$,M$U$$$]