Ken Leech, lead manager of the $9.4bn Legg Mason Western Asset Macro Opportunities Bond fund, has said a quarter of BB-rated US high-yield bonds could be upgraded to investment grade in the next 18 months.
The CIO of the Legg Mason affiliate Western Asset said a supportive US growth outlook, as well as the removal of stimulus and a gradual increase in interest rates, is resulting in spread sectors offering value for investors.
He explained the bulk of re-ratings to investment grade is likely to be within "rising star issuers", which his fund focuses on within its 9% exposure to high-yield debt.
"In total, we think one in four BB rated bonds could be upgraded in the next 18 months if our outlook proves broadly correct," he said.
"High-yield corporate bond spreads have moved through historical averages but we believe this is justified when considering both fundamental and technical factors."
Leech added the fund's exposure to high-yield bonds was concentrated within "idiosyncratic risk in favoured subsectors and issuers", such as energy and financials.
Launched in 2013, the Legg Mason Western Asset Macro Opportunities Bond fund has returned 10.5% over three years, with losses of 1.1% on a one-year basis, according to FE. Meanwhile the IA Sterling Strategic bond sector has seen gains of 9.3% and 0.8% over three years and one year respectively.
The fund has increased its holdings in US fixed income in recent months, upping its exposure from 47.9% on 31 January to 59.8% as of 31 March, according to FE.
In addition to opportunities in US high-yield bonds, the fund has also been targeting opportunities in emerging market debts on the back of rising US interest rates.
The fund has around 40% of its assets in emerging markets including Brazil, Russia and Argentina.
Leech said: "We remain constructive on EM debt and believe there is room for further spread compression versus developed markets.
"We are therefore positioned to benefit from potential risk premiums in select emerging markets bonds by maintaining exposure to countries exhibiting positive fundamentals and cheap valuations."