In recent weeks, the wealth management industry has urged investors to take advantage of the rout in high yield and emerging market debt. A popular pitch has been to argue that high yield and emerging market bond prices are reflecting recessionary conditions, but no U.S. recession appears on the horizon. This is a myopic and naïve argument, in my opinion. It is certainly possible for a sector of an economy to move into recession without the entire U.S. economy experiencing two consecutive quarters of negative headline GDP. It is also possible for a foreign economy (or economies) to enter recession without the U.S. doing so.

At the present time, the high yield markets are pricing in a significant wave of defaults in the oil, gas and materials sectors, and a potential spillover into the broader high yield market. I speak with quite a number of fixed income market participants and read much trader commentary/chatter. Among traders, there is very little argument on this topic. One market participant contact described the high yield market in terms so profound and disgusting that decorum prohibits listing them here.

Another contact points out that the shale industry has $1.2B in interest payments due by March 31^st. It is believed that many lower-rated energy exploration and production companies will be unable to service this debt. Some speculators are counting on defaults. Market participant color indicates that there is a bevy of capital on the sidelines waiting to deploy after the expected defaults occur. When it comes to calling a market, I prefer to use my own observation skills and knowledge, as well as the skills and knowledge of my fellow fixed income professionals, rather than those with less knowledge and, possibly, ulterior motives. By now, I have become comfortable with my abilities to separate fact from fiction.

Although some high yield debt might be attractive at present, I am inclined to wait before putting money to work (where suitable) in the high yield markets. Investors and advisors must be aware that one might need to ride out a high yield bond(s) through the bankruptcy process, possibly becoming a shareholder in the said company for the speculation to be successful, as the result of bankruptcy. In my opinion, if one cannot withstand volatility and a cessation of coupon payments, and might be inclined to press the sell button if/when there is another leg down in junk debt, they should probably not be invested in this area of the fixed income markets in the first place.

There is another phenomenon which has appeared in the credit markets. BBB-rated oil and gas company bonds are trading at similar levels, or in some cases, with higher yields than some junk-rated bonds. In my opinion, this is mainly due to two factors:

1) Bond market participants are intent on forcing oil and gas CEOs to sell assets, cut expenses and restructure companies.

The wealth management industry has done an excellent job convincing investors and advisors to pour money into high yield debt, while almost ignoring the lower end of the investment market.

2) The wealth management industry has done an excellent job convincing investors and advisors to pour money into high yield debt, while almost ignoring the lower end of the investment market.

At the present time, I see little reason to rush into high yield credits. I prefer to keep my powder dry and wait for the smoke to clear.