June 15 - BNP Paribas' Marty Fridson says high-yield debt is trading at close to extreme spreads relative to fair value and that we won't see any significant tightening until Europe's issues are resolved.
High yield bond spreads widened over the past month as markets grew increasingly concerned about a slowing US economy as well -- that continued turmoil in Europe. That does high risk mean higher rewards for his thoughts I'm joined now by -- fruits and global credit strategist at BNP Paribas investment partners -- dispute in Nicosia but the Greek elections obviously will be the big focus as we headed to next week. High -- market telling you about race in -- Well they're telling us that they matter you could take the view that. It doesn't really make any difference the US economy is not very dependent on exports to Europe. And our economy has performed better we're still in positive GDP growth. -- Europe sliding into recession but. The market cares about it if for no other reason then. The potential impact on the global financial system and have a potentially very explosive. Situation over there so. We have had a risk on risk off. Mode for quite awhile now and it primarily driven by the short term improvements -- -- short term. Decline in the outlook for -- And even some of these uncertainties that may or may not even get resolved next week things might look worse we just don't know. Where do you see high yield bonds trading now in the weeks and months ahead. They're at a spread now that is close to an extreme by our calculation. Relative to fair value. They've been recently. Over 700 basis point spread over treasuries. Have come in a little bit below that level but I I think that. When you get it to the wide end of that range. You do start to see interest from some of the the more value oriented investors who were not necessarily full time high -- players but come in opportunistically. When they see that opportunity they have some. Vehicles they can use such as exchange traded funds now -- You don't necessarily have to go in and pick individual credits so I think that that's likely to provide some support. On the other hand we probably won't tighten dramatically until people feel there is more permanent. Resolution or alternatively we see the nuclear option of just the massive. I guarantee you all of -- European. The bank debt or something else that really. What causes the procedures come down very dramatically. -- tell you right now that we are seeing a significant increase in the likely that the files. Not really -- spreads. Reflect a number of factors the you know liquidity being a factor there. We are likely see some modest increase but still to levels a year from now they're like the people low. Historical averages so. Barring a return to recession in the US which cannot rule out. You know entirely but generally viewed -- only about it. 16%. Probability according to consensus type. Forecasts. Probably won't see an escalation and as a matter of fact even in the event of recession we have fairly good cushion in. The balance sheets of companies so we prop.