Even before Ray Dalio doubled down on his warning that the US has become as dangerously fragmented as during the pre-World War II days of 1937, prompting him to “tactically reduce” risk, some of the biggest names on Wall Street were selling.
Two weeks ago, T.Rowe Price made waves when it said that it had cut the stock portion of its asset allocation portfolios to the lowest level since 2000. The Baltimore-based money manager said it also reduced its holdings of high-yield bonds and emerging market bonds for the same reason. Roughly at the same time, in its mid-year review, Pimco said that “with the macroeconomic backdrop evolving in the face of potentially negative pivot points and considering asset prices generally are fully valued, we are modestly risk-off in our overall positioning” adding that “we recognize events could still surprise to the upside, but starting valuations leave little room for error.”
This followed a similar preannouncement by DoubleLine’s Jeff Gundlach who not only said that he is reducing his positions in junk bonds, EM debt and other lower-quality investments, but predicted – correctly – the volatility spike in the first week of August.
Then it was Guggenheim’s turn to make a similar warning: in its Q3 Fixed Income Outlook, the asset manager said that “the downside risk of a near-term market correction grows the longer volatility
remains depressed. Asset prices are at record highs while volatility has rarely been lower. Our Global CIO and Macroeconomic and Investment Research team believe these indicators point to a dangerous level of complacency in the market, which has shrugged off the Fed’s guidance that economic conditions support monetary tightening… given where asset prices are, they would have a long way to fall.”
Guggeneim CIO Anne Walsh also warned that “high-yield corporate bonds are particularly at risk due to their relatively rich pricing, so we have continued to significantly reduce our exposure to that sector. The high-yield corporate bond allocations across our Core and Multi-Credit strategies are now at the lowest level since their inception. The bank loan allocation has also been reduced as a majority of the market is trading at or above par with some loans trading at negative yields to call.”
The list above is by no means exhaustive: according to a Bloomberg calculations, investors overseeing a total of over $1.1 trillion have been cutting exposure to junk bonds amid growing concerns about rising rates, central bank policy and general geopolitical uncertainty.
Below courtesy of Bloomberg, is the list of money managers who have recently cut holdings of junk debt:
JPMorgan Asset Management; AUM: $17 billion (for Absolute Return & Opportunistic Fixed-Income team)
- In early July told Bloomberg they have cut holdings of junk debt to about 40 percent from more than half.
- “We are more likely to decrease risk rather than increase risk due to valuations,” New York-based portfolio manager Daniel Goldberg said.
DoubleLine Capital LP; AUM: about $110 billion
- Jeffrey Gundlach, co-founder and chief executive officer, said in an interview published Aug. 8 he’s reducing holdings in junk bonds and emerging-market debt and investing more in higher-quality credits with less sensitivity to rising interest rates.
- European high-yield bonds have hit “wack-o season,” Gundlach said in a tweet last week.
Allianz Global Investors; AUM: $586 billion
- David Newman, head of global high yield, said in an interview his fund has begun trimming its euro high-yield exposure because record valuations make the notes particularly vulnerable in a wider selloff.
Deutsche Asset Management; AUM: 100 billion euro ($117 billion) in multi-asset portfolios
- Said earlier this month it has reduced holdings of European junk bonds.
- The funds are shifting focus to equities, where there is more potential upside and higher yields from dividends, according to Christian Hille, the Frankfurt-based global head of multi asset.
Guggenheim Partners; AUM: >$209 billion
- Reduced allocation to high-yield corporate bonds across core and multi-credit strategies to the lowest level since its inception, according to a third-quarter outlook published on Thursday.
- Junk bonds are “particularly at risk due to their relatively rich pricing,” portfolio managers including James Michal say in outlook report.
Brandywine Global Investment Management; AUM: $72 billion
- Fund has cut euro junk-bond allocations to a seven-year low because of valuation concerns, Regina Borromeo, head of international high yield, said in an interview this month
Who knows if these marquee names are right: if it’s them against the central banks, all their sales will do is forego potential profits as the world’s central banks push yields and spreads to levels that are beyond laughably ludicrous, but such is life in a centrally planned world where nothing makes sense. We do have one question: if asset managers with more than $1.1 trillion in AUM are all selling junk bonds, i) who is buying, and ii) how is it possible that the yield on the Barclays global HY index has barly budged from all time lows?
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