High Yield Daily Update

The high yield corporate debt markets are a bit lower to start the week on outflows from mutual and exchange traded funds to the tune of $622M for week ending November 8th, making it two weeks in a row of outflows.  There appears to be profit taking in high yield and a switch to higher rated securities, as witnessed by outflows from the high yield index-based ETF’s and inflows into the investment grade and Treasury ETF’s.  We also saw equity markets down last week, as both equities and high yield have steadily risen over the year, with the S&P up 16.9% and Bloomberg Barclays High Yield Index up 7.5% for the first 10mos of the year.1  We believe the strategy should be to stay invested to collect the income generated by high yield corporate debt, but a bit of market weakness can create an opportunity to dollar cost average to buy bonds and loans at lower prices.

Oil was higher again last week on the back of OPEC still cooperating in production curbs, while the rig count went down.  Oil is flat today with an increase in rig count in the latest release.  OPEC estimates global oil demand growth of 1.51MMb/d which is up 130kb/d from last month’s report, with China continuing to lead the growth side of the equation.2

There were nine deals for $3.4bn that priced last week while there are another dozen on the forward calendar. Some of these new-issues have weakened post trading; we believe you still must be selective and understand the indicated demand for each deal.  Moody’s expects the global speculative-grade default rate to decline to 2.1% over the next year, which we believe indicates a continued positive outlook for high yield bonds.

Many ask about our opinion on Treasury yields and where they are headed.  We continue to point to the huge demographic change in population around the world, which we believe creates headwinds against world GDP growth and inflation, and continued QE going on in many countries—all of which we believe serves to moderate rate increases.  If you go back and read past publications on our website, www.peritusasset.com, you will see at the beginning of 2016 we called for lower long-term Treasury rates, rather than a sizable move higher as many had projected. What has happened to the yield curve in 2017?

From two years to 10 years: 72 basis points, down from 125

From two years to 30 years: 119 basis points, down from 187

From five years to 10 years: 33 basis points, down from 52

From five years to 30 years: 80 basis points, down from 114

1  Bloomberg Barclays Capital U.S. High Yield Index covers the universe of fixed rate, non-investment grade debt (source Barclays Capital). The S&P 500 Index is a broad-based, unmanaged measurement of changes in stock market conditions based on the average of 500 widely held common stocks. S&P 500 index data sourced from Bloomberg, using a total return including dividend reinvestment. Data as of 10/31/17.
“OPEC Monthly Oil Market Report,” http://www.opec.org/opec_web/static_files_project/media/downloads/publications/OPEC%20MOMR%20August%202017.pdf, November, 13, 2017, p. 30.
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