High yield was slightly better yesterday and opening up the same today. With so many saying high yield is teetering on a big correction or a collapse, the underlying market does not show this nor does the health of corporate America. Moody’s is projecting continued declines in corporate default rates over the next year and the covenant stress index declined to 2.3%, suggesting a low risk of issuers violating financial maintenance covenants. So where is the stress, other than in certain securities but that is ALWAYS the case? If the market was in trouble then the new-issue market does not show it, as six deals for two billion in proceeds came yesterday with two thirds of that were CCC rated and another was a PIK.
The biggest uncertainty is with the new Fed and their rate direction as Yellen and Dudley are stepping down. Even if the long end rises, we believe the asset class to be in is high yield corporates, with their larger coupons and lower durations, see our paper “Strategies for Investing in a Rising Rate Environment.”