A credit head at the world's biggest investor breaks down why investors are pouring into one of the riskiest markets

In our recent interview with

This interview was edited for length and clarity.

Akin Oyedele: There has recently been a surge of inflows into high-yield debt. What do you think is behind this?

Jim Keenan:

But the backdrop still seems okay. The reasons include we continue to have economic tailwinds. Remember that in 2015, we had an earnings recession where you had the commodity sell-off that flowed into other sectors. You had a pretty big pullback in risk assets and certainly in the credit markets that slowed down a lot of the emerging-market countries. And then mid-2016, you started to see that recover.

That in it's very nature started to create almost like a mini-cycle where you started to see some more positive upside. Fuel got put on the fire with the election at the end of the year. Not that it's been approved or enacted, but you have a government in which the rhetoric behind their policy is one that is pro-US growth and pro-reflation. Even though prices for credit assets might not be that exciting from an absolute return perspective, this environment will tend to be something that produces decent relative returns.

A lot of the high yield and bank-loan assets are still going to be subject to volatility. But if you look over the next 12-18 months, if this policy comes through, you're at a period of time where fixed-income assets and more rate-sensitive assets could be exposed to inflation picking up further, and being very subject to interpretations of both fiscal policy and monetary response to that policy. Your outcome for rate assets could be dramatic with regard to the shape of the curve and the level of inflation.

It's harder to invest in an environment where you still have a very low absolute yield across global fixed income assets or rate assets. You're also at a point in time where there's a lot volatility associated with the timing and success of fiscal policy, which could lead to more volatile drawdowns in the equity market. So you get more upside convexity if all this comes through, but certainly people are starting to question that.

High yield and bank loans tend be tied towards the health of corporate profits. US high yield is tied towards the local companies which benefit from a lot of these policies. Maybe you're going to make a 4-5% return profile off that. In today's world, if you can do that with a higher degree of confidence because of the current economic and policy environment, that's what's leading to people taking money off the shelf and put it in. It's not because there's a high expectation that you're going to see spreads rally. It just becomes attractive viz-a-viz that backdrop.

Oyedele: So based on this macro backdrop, do you think that the premium of high-yield above Treasurys is fairly valued?

Keenan:

Oyedele: What sectors do you like and dislike right now?

Keenan:

A credit head at the world's biggest investor breaks down why investors are pouring into one of the riskiest markets

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