Marty Fridson, whose analysis of junk bonds has been scrutinized by Wall Street since 1984, says the market is “extremely overvalued” in aggregate but there are still opportunities for investors.
There’s value in the bonds of companies in the building materials, diversified financial services, food, beverage and tobacco and utilities sectors, he said in an interview. These bonds are cheap versus comparably-rated ones, and also have a fairly high chance of getting credit rating upgrades, said the chief executive officer of FridsonVision LLC.
He warns that bonds from container and aerospace borrowers appear expensive compared with similarly-rated issuers. And that debt from those companies is more likely to get downgraded.
Fridson, whose work at Morgan Stanley & Co. and Merrill Lynch & Co. was required reading for junk bond investors during the 1980s and ‘90s, this week launched a new solo research venture, FridsonVision High Yield Strategy. In his view, U.S. junk bonds are “extremely overvalued” at an index spread just above 300 bps.
Rapid growth in private credit is partly to blame, according to Fridson. It’s reduced the supply of high-yield bonds by expanding private investors’ reach to large corporations—from the small-to-medium-sized enterprises that market had initially funded—while demand for the debt has continued to grow.
To determine fair value, Fridson weighs bond spreads in the context of credit availability, economic indicators, default rates, Treasury yields and quantitative easing. According to his model, junk bonds are more than one standard deviation tight to fair value.
The rare other times that valuations were so stretched include a period before the global financial crisis and after the Federal Reserve backstopped risky debt when the economy slammed shut during the pandemic in 2020.
This article was provided by Bloomberg News.