Kames Capital: “Should bond investors prepare for a seasonal wobble?”

Bond markets could be impacted by a seasonal sell-off in the near-term as investors “sell in May and go away”, Kames Capital’s Phil Milburn says.
The St Leger’s Day adage is one of the most famous sayings in financial markets, and with valuations elevated across parts of the fixed income market, there may well be better opportunities to invest at a later date, the manager says.
Milburn, co-manager of the £1bn Kames High Yield Bond fund, is therefore holding some additional cash in the current environment, with the fund running some 11.7% in the asset class.
“The fund’s cash position looks optically high after some sales in March but we will only deploy this when suitable opportunities arise,” Milburn says.
“Seasonally, May tends to witness a small market wobble and we are well placed to oppose any shorter term sell-off to create value over the longer term.”
Across the high yield market, default risk remains on the agenda following the events in the US energy sector, but Milburn added he was “relatively sanguine” about the endogenous outlook for developed world high yield markets when it came to default rates.
“There will always be pinch points and these include retailing in many parts of the world, as well as other sectors strongly impacted by technological evolution,” he says.
“However, these areas are now small enough as a percentage of the market to be treated as idiosyncratic risk rather than a systemic problem.”
Milburn’s main area of concern, and one that the fund is therefore avoiding, remains emerging market high yield corporate debt.
He warns there is a big currency mismatch between debt issued in hard currency and local earnings.
Nonetheless, he said in the main, high yield debt markets were supported by strong economic growth and rates that are still at or near record lows, meaning companies can cope comfortably with their debt burdens.
“Overall, we remain in a period of financial repression with some late cycle attributes, such as higher corporate leverage, but authorities have invested so much in sustaining the economic cycle that a rapid rise in rates is almost inconceivable,” he said.