(Bloomberg) -- The U.S. economy is veering toward a recession that will cause yields on corporate junk bonds to rise to around 10% as defaults increase, said Bruce Richards, chief executive officer and co-founder of Marathon Asset Management.
Yields on below-investment-grade debt have already surged to about 7.6% this year from a little more than 4% in late December, according to Bloomberg’s index.
Marathon, which has about $24 billion in assets, is currently focused on buying senior secured notes with yields between 8-10%, many of which were yielding between 4-6% at the start of the year, Richards said during a Bloomberg Television interview on Tuesday. But he expects the broader market to come under pressure as liquidity weakens while the Federal Reserve tightens monetary policy.
“We haven’t had a vacuum of liquidity where the market really gaps lower and there’s no bid and there’s no Fed put, and we’re going to move to that before this is over,” he said.
While markets are stabilizing, with stocks advancing Tuesday, Richards said he expects that the Fed will be unable to orchestrate a soft landing for the economy. Instead, he’s among those who expect rate hikes to set off a contraction as the central bank seeks to tame inflation.
He expects junk-bond default rates will go from less than 1% to more than 5%.
“The consumer is not buying more,” he said. “If you go to Home Depot and Walmart you’ll see the consumer is actually walking out of the stores with less, but they spent a lot more because the prices were up a lot.”
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