KKR’s Sheldon Sees Room for High-Yield ‘Tantrum’ as Fed Exits
(Bloomberg) -- All it took for the Federal Reserve to stabilize the collapsing high-yield bond market was its pledge 11 months ago to buy exchange-traded funds. Now it must decide how to withdraw that support, and doing so could be much trickier.
Chris Sheldon, head of leveraged credit at KKR & Co., said there’s potential for a disorderly stampede out of mutual funds and exchange-traded funds that invest in junk bonds, comparing it to the now-infamous “taper tantrum” that followed a Fed announcement on quantitative easing in 2013.
“I do worry about that,” Sheldon said in an interview Thursday on Bloomberg Television. “A big part of the high-yield market is in those daily liquidity vehicles -- we estimate it’s about 40% -- and those are definitely going to be much more equity-linked or closer to a correlation of 1 when we see messaging around the Fed.”
KKR, he added, would be a buyer in such a scenario, hoping to pick up underpriced credits in the sell-off. But his comments underscore the fragile state of financial markets and the daunting prospect of even mentioning, let alone removing, the monetary stimulus that brought them roaring back from pandemic lows.
A sudden jump in Treasury yields has revived predictions of a tantrum in the government-bond market if monetary authorities cut back too quickly on $120 billion a month of asset purchases.
While the Fed’s support for corporate borrowing was tiny by comparison, it still owns $8.6 billion of ETFs and $5.4 billion of bonds under two credit facilities that expired on Dec. 31, according to its latest report to Congress. The central bank hasn’t said when it plans to sell those holdings or whether any will be allowed to mature.
Already, high-yield investors are on a hair trigger, pulling $5.33 billion out of junk-bond mutual funds in the week ended March 10, the most since July. Corporate bond ETFs led the outflows, which showed a $3.86 billion net withdrawal in the period ended March 9.
“We’re definitely paying attention,” Sheldon said. “We track every high-yield bond that’s in every high-yield ETF or mutual fund, monitoring the book, repositioning the portfolios as a result.”
KKR is a major player in so-called liquid credit, specifically junk bonds and leveraged loans, and in early 2020 raised a “dislocation” fund that returned 52% by buying beaten-up securities and providing rescue financing to desperate borrowers. Sheldon said making money is “a lot harder” now that credit spreads have tightened and junk-bond yields are less than 4.5%.
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