High Yield Update

High yield bonds and loans were mixed yesterday as outflows continue to dog the loan market.  Despite the “experts” Gundlach and Gross calling for higher 10-year Treasury yields, the 10-year continues to fall hitting 2.16% yesterday, down from a YTD high of over 2.6%.  Is this talking up their own book of trades or are they really tuned into the reality of demographics and the lack of real growth around the world?

We believe the outlook for high yield remains good despite the indexes being on the tight side of historical spreads over Treasuries.  Corporate default rates continued to decline, with Moody’s US speculative default rate closing 2Q at 3.8% versus 4.7% in 1Q. Moody’s expects the U.S. default rate to further drop to 2.4% a year from now.  Moody’s Liquidity Stress Index declined further in July to 3.3% down from 3.5% in June as it edged closer to its all-time low of 2.8% signaling fewer defaults.  Given this scenario and where the high yield index’s trade, we would continue to direct investors toward active management as we believe security and industry selection will be key to producing consistent returns going forward.

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