Volatility could cause credit markets to break this year – TCW’s Bryan Whalen

Investors aren’t being paid enough a premium for the risks in US corporate credit, said Bryan Whalen, chief investment officer of fixed income at TCW, on the latest ‘Credit Exchange with Lisa Lee’ podcast.

Whalen, who oversees USD 180bn in fixed income assets, contends investment-grade corporate credit spreads should be paying 50% more than they are. Investors should be getting 120 basis points of spread for IG bonds, but today they are getting paid close to 80bps, Whalen said.

During the April volatility, there was a repricing of credit risk, but it didn’t lasted long enough to call the markets broken. But markets aren’t out of the woods, and it’s on the list of possibilities this year, according to Whalen. There are a lot of things that could cause volatility and if the Federal Reserve seems reluctant to rush to rescue markets, “you might actually see the market is broken because of the lack of liquidity,” Whalen said. “And it will stay broken, and that will magnify the downturn.”

While Whalen likes being underweight corporate credit, he sees attractiveness in parts of the securitised market – mortgage-backed securities in particular, because some buyers that have traditionally been in the space have temporarily pulled back. Moreover, while Whalen doesn’t like US high yield bonds, he does like some high yield bonds in emerging markets. Asia has the potential to outperform relative to the rest of the world.

On European growth prospects, markets may have gotten a little ahead of themselves on the narrative of a fiscal spending boost, and taken a pause on the approach of what Whalen describes, tongue-in-cheek, the “exporting of exceptionalism.” Still, there are some good opportunities in euro-denominated investment-grade corporate bonds, where investors get paid a decent amount of additional spread for the same company in a euro currency versus US dollars, he noted.