The market for high-yield mining and energy debt is suffering from the some of the same issues that sparked the 2008 crisis as investors turn a blind eye to poor credit in their desperation for fatter returns, according to an executive with one of Canada’s largest hedge funds.
Fund managers are snapping up lower-quality debt in a bid to outperform their competitors and retail investors don’t understand the underlying credit risk, particularly in exchange-traded funds, said Rick Rule, chief executive officer of Sprott U.S. Holdings Inc., a subsidiary of Toronto-based Sprott Inc. with C$9.2 billion ($6.9 billion) under management.
“It wouldn’t take anything at all to have the same circumstance occur in mining and energy junk debt that happened in mortgage securities,” Rule said in an interview in Toronto Monday. “Remember that nothing precipitously changed in the housing market in 2008. It’s just that people began to do the arithmetic.”
Rule sees a similar thirst for yield driving investors into junk debt that pushed investors into subprime mortgages, which ultimately blew up, helping to touch off the financial crisis.
High-yield bond spreads hit a 32-month low last week, according to the Bloomberg Barclays High Yield Index. Energy bonds have returned 51 percent over the past year, the best-performing industry, according to a Bank of America Merrill Lynch index.
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