High Yield Daily Update

High yield bonds finished lower yesterday fueled by large outflows from the retail sector.  Lipper reported an outflow of $3.1B from weekly reporting high yield mutual and exchange traded funds, the largest in nearly a year.  Reportedly, $2B came from high yield ETF’s and $1.1B from mutual funds.  A small inflow into high yield floating rate loans was fueled by the rise in the 10-year Treasury as it hit 2.64%, the highest level since September of 2014 but is well below the high of 3% that was touched earlier that year.  Speaking to the state of corporate America, “Fallen Angels” were at the lowest level in three years in 2017 with just $16.3B moving from investment grade to high yield. In 2016 we saw $66.4B and 2015 had $45.5B in bonds downgraded to high yield.1

For investors seeking returns that outpace the various high yield indexes, we believe that you should look to find an active manager like Peritus that has the ability to add alpha by selecting securities that trade below their projected take out price.  Additionally, within the floating rate loan market, 76.3% of the loan index trades above par, which is approaching March 2016’s multi-year high (of 76.4%),2 thus we believe your manager must also be able to do fundamental work to determine which of these loans trading at a discount to par will provide that alpha.  We believe that simply buying an index is not going to protect you and add a lot of value to your portfolio.

1,2  Jantzen, Nelson, CFA and Peter Acciavatti, “JPM High-Yield and Leverage Loan Morning Intelligence,” J.P. Morgan North American Credit Research, 1/19/18, https://markets.jpmorgan.com.
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