High Yield finished Friday flat and is opening this Monday slightly weaker as the 10-year Treasury rises to a three year high of 2.71%. Only one new-issue priced on Friday but this week’s calendar is active with six deals already on the docket. High yield bond weekly reporting mutual and exchange traded funds saw another -$1.13B outflow in the week ended 1-24-2018, after -$3B the prior week. It looks like much of the outflows are coming from the longer duration index tracking funds. Moody’s Liquidity Stress Indicator kicked off 2018 with a new low of 2.4% as of mid-January as many junk issuers are experiencing steady economic growth and healthy credit markets. Moody’s US speculative grade default rates are forecast to drop to 2.4% by the end of this year from 3.3% in December 2017.
We believe that high yield investors should not fear rising rates like they should in some other asset classes and the reason is multi-fold. One, as new-issues come to market in a rising rate environment the coupon and new-issue price will reflect this new, higher Treasury rate. Additionally, high yield bonds have historically outperformed certain other fixed income asset classes in rising rate environments, helped by their higher coupons and shorter maturities and with that less correlation to increases in Treasury rates. For a more detailed analysis see our recent commentary, “High Yield in a Rising Rate Environment.”