By Michael Brush, MarketWatch
Investing lore has it that bond investors are the “smart money” since they know their way around financial statements.
I’m not sure this is true. But if it is, bond guru Mark Vaselkiv may qualify as one of the smarter investors around. He’s the chief investment officer for fixed income at T. Rowe Price, which manages an impressive $148 billion in bond fund assets.
Vaselkiv, 62, has been in the business for nearly 35 years (31 at T. Rowe Price). So he’s battle-tested by several crises — a few of which were so bad they make coronavirus look like child’s play. He also has a decent record. His $8 billion T. Rowe Price High Yield Fund /zigman2/quotes/206354776/realtime PRHYX 0.00% , which he managed from 1996 to 2019, was a top 10% fund in its Lipper category during his tenure, returning an annualized 7.16%. That’s less than the 9% for the S&P 500 index /zigman2/quotes/210599714/realtime SPX +0.36% over the same time. But Vaselkiv did it with half the volatility.
During these trouble times in the markets, it makes sense to check in with this seasoned “bond whisperer” to see what the smart money in fixed income is telling us about coronavirus, the risk of recession and other issues that will impact your portfolio.
Here are five key takeaways from a recent chat with him.
1. Coronavirus will not kill off the expansion
“We ultimately think it could get worse, and maybe we are still in the early innings of what could prove to be a pandemic,” says Vaselkiv. But he puts the probabilities of the worst-case scenario — a global recession — at just 15%.
To support his case, Vaselkiv says that spreads on high-yield bonds — a good place to look for signs of trouble — have not blown out relative to higher quality corporate paper and Treasurys. Widening high-yield spreads were an early predictor of the market crash during the 2008 financial crisis.
“High yield has held in extremely well, except energy,” he says. “This tells us the market is optimistic we are going to get through this, and it won’t end up tipping economy into recession. Economies are resilient. We have been through a lot worse than the coronavirus.”
Vaselkiv is in the camp that holds the rebound in economies once virus fears die down will offset the near-term damage. So full-year GDP growth will be about the same as what was projected before the coronavirus outbreak. That was the pattern with past virus scares, as economies responded to government stimulus rolled out to offset the damage.
But wait a second. Aren’t the record-low yields on U.S. government bonds signaling economic trouble ahead? Vaselkiv doesn’t think so. He believes these yields are low because money managers have flocked to U.S. debt to hedge their stock-market gains against declines. “People are buying insurance,” he says.
That now looks like a crowded trade, fraught with some risk. “If the virus situation dies down, the Treasury market will give a lot of that back,” he cautions.
2. The energy sector is a mess but that’s creating opportunity
About a quarter of high-yield bonds in energy are trading at distressed levels. This means their yields are more than 10 percentage points over the yields on “risk free” five-year Treasury bonds /zigman2/quotes/211347048/realtime BX:TMUBMUSD05Y +0.80% . Junk bonds in energy now yield a little over 11% on average, vs. around 1.2% for five-year Treasurys.