With interest rates expected to remain low, pushing down yields on sovereign bonds, investors will continue to look for higher yields in the corporate credit market, says CIBC Asset Management’s Nicholas Leach.
Geopolitical uncertainty and low inflation are pushing central banks to cut interest rates or keep them low. The U.S. Federal Reserve cut its key lending rate in July for the first time since 2008.
“As long as inflation remains low, central banks have at least one reason to keep interest rates low, and that should continue to push investors into the higher-yielding corporate credits,” said Leach, vice-president of global fixed income at CIBC Asset Management, in an Aug. 19 interview.
Leach believes technology will keep a lid on global inflation for the long term. He pointed to the dramatic effect of smartphones in driving prices lower, as well as the impact of competition from Amazon and eBay.
“Every consumer is walking around with what is essentially a mobile price-discovery device, and this has really empowered them,” Leach said. “This momentum with technology is only going to improve. We’re going to be introduced to 5G wireless, artificial intelligence, smart cities, autonomous driving, and all of this should continue to contribute to lower costs.”
The persistence of geopolitical uncertainty is less certain, said Leach, who manages the Renaissance High-Yield Bond Fund. It’s very difficult to predict the outcome of trade wars and Brexit, he said, though geopolitical risks are generally short-term.
“If there is an improvement, we should see an improvement in corporate spreads tightening,” he said.
For the time being, there are opportunities in high-yield corporates.
One of the largest high-yield holdings in Leach’s fund is Sprint Communications, the fourth-largest wireless provider in the U.S. In July, the Justice Department approved T-Mobile’s $26-billion takeover of Sprint, which would merge the third- and fourth-largest U.S. providers.
“Credit spreads on the five-year Sprint bonds are around 400 basis points,” said Leach. “T-mobile is closer to 160 [basis points]. We think those credit spreads should converge as the merger proceeds.”
Even if the merger falls through, Leach said Sprint bonds offer great value. The company has $34 billion in revenues, $10 billion in operating cash flow, and a $27-billion equity-market cushion, he said.
Sprint’s subscriber base is almost twice the size of Canada’s big three providers— Rogers, Telus and Bell—combined, he said, with a balance sheet and leverage profile similar to the Canadian telcos’.
“At a 400-basis-point spread and 5.5% yield, we think [Sprint is] really undervalued,” he said.
Another overweight for his team is First Quantum, a leading global copper producer that recently spent billions developing the new copper mine in Panama, Leach said.
The new mine, which Leach said would be one of the world’s largest and lowest-cost, will have “a positive material impact” on First Quantum’s revenues, cash flows, leverage profile and diversification.
The company’s five-year bonds, which Leach said yield 9% and come with a $7-billion market cap cushion, are “very, very attractive.”
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