High yield was a bit better yesterday as oil rose and Treasury yields faded. The yield curve is the flattest since 2007 and front end yields are the highest since 2008. Is this the credit markets telling you there is no real inflation on the horizon despite the Fed wanting to raise rates? I think it’s both the hunt for yield in a safe place fueled by the demographic movement plus there is no real demand as we witnessed by recent company earnings.
Turkey threatened to shut down Kurdish oil exports in response to the region’s independence vote, which pushed oil prices higher yesterday. Oil is a touch lower today as Moody’s notes that the outlook for the global oilfield services and drilling sector was stable and that the “worst” was over, with the sector now in the early stages of a cyclical recovery.
Moody’s Liquidity Stress Index was nearing record lows as it dipped to 3.2% in mid-September from 3.4% in August, indicating corporate liquidity has strengthened. Outside of any geopolitical problems, I don’t see a big catalyst for downside other than there will be some that take money off the table from time to time. If and when this happens, we would view it as an opportunity to dollar cost average as we don’t believe the demand for yield is going away.
BB credits are hitting multiyear yield lows, which we believe is another reason why investors should look to active management to find value. As an active manager, we focus the credits that we believe provide investors an attractive risk/reward and our goal is to provide both tangible yield distribution and total return above the index.