Credit ‘scare’ will open up ideal high yield entry point says Schroders’ Sparks

High yield may have experienced record inflows in recent weeks but Wesley Sparks, head of US fixed income at Schroders is not convinced - he’s holding out for a credit quality ‘scare’ before pulling the trigger on his purchases.

‘High yield in 2012 is the best opportunity, but it’s all about the timing,’ he said at the firm’s conference in New York this week.

‘We’re not pounding the table to buy today but there will come a time to pounce.’

Currently, Sparks, who manages the firm’s ISF Global High Yield fund as well as the broader remitted ISF Global Corporate Bond, has 7% exposure to high yield, down from 15% earlier this year.

He envisages upping this in mid 2012 as he eyes a dislocation in the market caused by the onset of QE3.

‘Federal government is taking on more debt but the consumer is deleveraging. In the US we don’t need austerity, we need "stimsterity",’ he said. 'While the US benefits from safe haven status, we can grow our way out of the problem.'

Monetary policy therefore he says will remain ‘accommodative’.

‘QE3 is highly likely in 2012 so in the end, higher yields will attract investment as the only way investors can get increased yield is to go down in credit quality.’

‘Further down the line though this could lead to a scare, then that will be the time to enter.’

And he’s seen that situation play out before; in September 2008 and in October this year.

In September 2008 spreads reached 900 basis points as the high yield financing market essentially closed between Q3 and Q4 that year, owing to deteriorating credit conditions.

In early October of this year spreads were in touching distance of the 900 basis point mark, off the back of heightened anxiety over the eurozone crisis.