Northern Trust Goes All In for Junk on Low-for-Longer Rates View

(Bloomberg) -- Northern Trust Asset Management, the $1.2 trillion money manager, is loading up on U.S. high-yield bonds as it sees rates staying low for years.

“We’re going to move back to the lower growth prospects in economies and inflation is going to be more contained and rates are going to stay low,” Colin Robertson, head of fixed income at the asset manager, said in a phone interview last week. “In this environment I would be fully invested. I would take as much credit risk as I can.” 

Robertson, who oversees $520 billion in fixed income assets, planned to add duration if U.S. 10-year yields rose above 1.5%, which happened this week. Federal Reserve officials have communicated increasingly hawkish signals in recent days as supply-chain bottlenecks threaten to keep inflation elevated.

“Investors and the Federal Reserve are way too ahead of themselves on when they’re going to be able to raise interest rates,” said Robertson. He has high conviction that the Fed won’t tighten through 2023 and thinks it will probably wait until at least 2025.

‘Get Overweight’

Northern Trust has been bullish on high-yield for months and is now significantly overweight.

“Credit markets are in better shape than people think,” said Robertson, pointing to higher average ratings than in 2007, slim default rates and debt maturities that have mostly been pushed out to 2028 or later. “If you’re not overweight, get overweight,” the investor said, speaking of junk bonds. 

Given better credit quality compared to history, Robertson expects spreads to stay tight for the long haul, with potential to compress further. He said investors have flipped from being worried about raising liquidity during routs to fretting over how to repurchase any bonds they sell. 

“There’s this insatiable appetite for bonds and for credit,” said Robertson. “That’s a huge dynamic in the market that people aren’t paying enough attention to that absolutely plays into the spreads.”

Robertson also likes short-dated debt as an alternative to money-market funds. “The best opportunity in credit is high yield, but I do think there’s a terrific opportunity in the short-end of the market,” he said. 
 
Adding to the bullish thesis on U.S. credit is the belief that the Fed will provide support, just as it did with buying programs last year, if markets come under pressure.

“You know that in the time of uber stress, that would be when you’d be most impacted, that this Fed -- and certainly I think the Fed that follows this -- will have your back,” said Robertson. “Why would you get out of the asset class?”

The biggest risk to Robertson’s thesis is inflation, which he ultimately expects to fade. “Part of the reason I’m not as worried about the inflation story now is because I think I have time for it to play out,” he said.

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