Why complacency (and not defaults) will become investors' kryptonite
T. Rowe Price's Mike Della Vedova answers six of our most burning questions in a high yield edition of Livewire's Rapid Fire.
The near-zero interest rate era which dominated the post-GFC and COVID markets created a lot of side effects. For macro aficionados, it increased fiscal spending (arguably to unsustainable levels) and created a stimulus program that has allowed many major economies (including Australia, for the moment) to stay out of recession. For bond aficionados, all this increased government spending fuelled a massive increase in bond issuance.
But the same can't be said for credit - particularly high yield, says Mike Della Vedova from T. Rowe Price. In fact, while rising interest rates could help fuel a major crunch, that may not be the biggest risk in credit markets when all is said and done.
In this edition of Livewire's Rapid Fire, Della Vedova sits down with me to answer six rapid fire questions. Listen in for Della Vedova's brilliant kid-like explanation of fixed income markets, the biggest opportunity he sees today, and the asset class(es) he would invest in if he couldn't partake in high yield markets.
Edited Transcript
Hans Lee: Alright Mike Della Vedova from T. Rowe Price, this is the Livewire Rapid Fire. I have six questions and we have two minutes. Are you ready to go?
Mike Della Vedova: Woohoo! I'll try! I'll talk fast!
Lee: Alright, let's go! Explain what high yield bonds are like I am a 12-year old child.
Della Vedova: Do you want a bit more pocket money this week? Would you like to get an extra $20? But you don't want to just go to your mum.
Write out four different promises for $5 each and give one to your mum one to your dad, and one to each of your brother and sister. When the time's up and you tell them when you're gonna pay them back, whoever's holding that piece of paper when that date comes, you give that money back to and they can swap them amongst themselves. That's a bond. That's a high yield bond.
Lee: What is the biggest opportunity in high yield today?
Della Vedova: To be honest, the general market is earning a high amount of income. If you have to pick a region, we'd say Europe, but it's the income that is the opportunity you have right now. It's the income you can generate for some of the highest yields and coupons we've seen in many, many years.
Lee: So what is the biggest risk, then, in high yield today?
Della Vedova: Technically, I should say default but it's complacency. Defaults are always there. But people who say that this is just the market that's going to do that and don't dig or look. Complacency is your biggest risk.
Lee: Speaking of complacency, true or false? Did ultra-low interest rates help fuel a boom in issuance - and now that we've got rapidly rising rates, will it cause a fizzling out?
Della Vedova: False. It's far more complex than that.
Lee: If you had to name one region where the most profitable high yield investments are, what region would you nominate?
Della Vedova: We like Europe right now. We just think you're getting compensated for the risks you see far better than anywhere else in the world.
Lee: And finally, Mike has been investing in high yield and investing in markets for for nearly 30 years. If you couldn't invest in higher yields, what is one asset class you'd invest in?
Della Vedova: I'm gonna cheat and say two. I'd go for the same type of risk return split over government bonds and probably global equities.
At the end of the day, high yield sits right in between and you're matching up the same type of risk-return. You're getting that income and you're getting the potential of an upside from equities. But you're relying on that income from government bonds. I'd pick the two and run a balanced portfolio that way.
Seeking high income and capital appreciation?
Learn more about how Mike and team approach to global fixed income securities by visiting the T Rowe Price website or the fund profile below
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Managed Fund
T. Rowe Price Global High Income Fund – S class
Global Fixed Income
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Hans is one of Livewire's senior editors. He is the creator and moderator of Livewire's economics series "Signal or Noise". Since joining Livewire in April 2022, his interview record includes such names as Fidelity International Global CIO Andrew McCaffery, JPMorgan Asset Management Global CEO George Gatch, and Lazard Chief Market Strategist Ron Temple just to name a few. He has a double degree in economics and journalism.
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Hans is one of Livewire's senior editors. He is the creator and moderator of Livewire's economics series "Signal or Noise". Since joining Livewire in April 2022, his interview record includes such names as Fidelity International Global CIO Andrew...
Expertise
Hans is one of Livewire's senior editors. He is the creator and moderator of Livewire's economics series "Signal or Noise". Since joining Livewire in April 2022, his interview record includes such names as Fidelity International Global CIO Andrew...
Expertise
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