The high yield debt markets are a bit softer again today on small outflows and on ancillary issues, rather than based on company fundamentals. The biggest issue being the confusion with the new Tax plan as many are fearing there might be a cap on interest deductibility. We are currently seeing a bond pickers market and believe you must be selective. Look no further than the Sprint bonds tumbling on the rumored breakup with T-Mobile.
Despite oil jumping to a 28 month high, the 10-year Treasury yield falling to 2.31% and equity markets hitting new highs, the high yield market has flat lined—which we would view as healthy. Also, Moody’s Liquidity Stress Index dropped to a record low of 2.7% in October, which we believe also signals a healthy high yield corporate environment. Two new-issues priced yesterday with a half dozen on the calendar. This should pick up as earnings blackout periods end.
I spoke at the ETF.com “Inside Fixed Income” conference, and the elephant in the room was where rates are going. As we have said for a few years now we feel the 10-year will stay closer to 2% than 3% based on many different factors we see. You can read our recent commentary explaining this, “Lower for Longer.” It is becoming harder to ignore the yield curve flattening, the 2s/10s curve is flattest it’s been in about a decade, so do your own work, don’t buy the media pundits.