The high yield bond market was slightly better yesterday and flat today, while the new-issue market is essentially closed until after Labor Day. Longer dated Treasuries yields continue to fall as the expectation is that any reform out of Washington DC likely won’t happen this year, thus we muddle along at 2 to 2 1/2% growth.
We believe the backdrop in high yield remains positive as the default rate keeps coming down and the continued strong liquidity stress index suggests corporations are still financially healthy, which we see as a good sign. It is hard for investors to get their heads around current yields but we are still living in a slow growth, low Treasury yield world. Until we see any kind of reform to spur growth or any kind of wage inflation, we believe the high yield market will remain boring and dull, but with continued coupon income generation and the potential in certain cases for some capital appreciation. However, it is our belief that active management can be key in this environment as the ability to buy and sell selective securities may allow for potential distribution/yield and total returns above that produced by the indexes.