Still, BlackRock isn’t telling investors to get out of high yield. But investors must compare how much high-yield exposure each has in his overall portfolio to his risk profile to see if he is overweight what he normally would be, Hayes said.
“If he is, it’s a good time to pare back,” he added, “because the liquidity in the high-yield market is still very good.”
And as for sectors, BlackRock still likes housing, hospitals and some areas of transportation.
Muni ratios to Treasuries have been a key component of one the market’s transitions from a rates market to a credit market, according to Hayes — and today they must get cheaper, he added.
Although the front end of the yield curve seems pretty well-anchored by the Fed, intermediate and long-term ratios are too rich for investors. The market has to reach levels that lure crossover buyers more consistently. Otherwise, it will be too volatile, Hayes said, which discourages retail.
Because munis have been less volatile over the past couple of years relative to most fixed-income and equities markets, they have attracted other types of buyers.
“And that means ratios stay elevated,” Hayes said. “In the absence of supply, ratios are down. When supply comes back, it’ll take better levels to clear the market, and that’s where we see the adjustment.”
In BlackRock’s view, if the transition from a rates market to a credit market is truly complete, then munis are always going to exist in a higher ratio environment and attract other buyers on an ongoing basis. “You can’t always be a retail-driven market,” Hayes said.
The process started around 2008, when the bond insurers started to lose their ratings and the credit nature of each issuer became more important. It concluded during the market disruption in late 2010.
When the market saw a big adjustment in ratios then, crossover buyers uncovered the value and entered the market more regularly. They became consistent buyers and sellers and provided liquidity.
“And that’s why we think we’re going to exist in this world of higher ratios, because we don’t have that big buyer on the margin that we always had,” Hayes said. “So, we need to exist at higher ratios in order to attract” crossover buyers.
