The High Yield Bond Market: The Year in Review

We’d characterize 2017 as a steady year for the high yield bond market.  Generally speaking, high yield bonds saw a steady move up with a few small blips down that were short-lived and met with buying.1

In total, the high yield market reported a 7.5% return for the year.2

We would view this as a solid return number, as it is not too far off the 20-year average of 7.8%.3  High yield bonds outperformed many other fixed income sectors, and while returns were less than the equity index returns in 2017, keep in mind high yield did outperform the equity index in 2016.4

In terms of market technicals, we saw a strong new issue market in 2017, with the fourth highest issuance level on record and up over last year.5

We saw a mixed market in terms of fund flows, with both ups and downs, but a total outflow for the year of $14.9bn according to Lipper.6

By no means has this been a “hot” market where money is being blindly thrown at it, which we believe can be a positive in that we don’t see any sort of “bubble” in current market spreads or yields, which in turn we believe makes current levels all the more sustainable.

For all of the worry about rising rates, spread levels, and a market getting ahead of itself after a very strong 2016, high yield bonds posted a solid 2017 and we expect a similar situation in 2018.  We will have more details in our coming writings about our outlook for the year ahead, but in short, we expect coupon-like returns and while there may be some potential for spread compression again this year, we believe that will be more limited on the index level given where spreads currently are.  However, with that in mind, the coupon generated by a portfolio and any potential discounts in a portfolio to call or maturity prices are all the more relevant, which is why we believe active management is all the more attractive if you are able to generate an above index coupon level.  At Peritus, our goal as an active manager is to focus on maximizing yield relative to risk with the objective of providing an above index-level yield/coupon generation and we believe this positions us well as we proceed through 2018.

Footnotes:
1  Based on the Bloomberg Barclays U.S. High Yield Index, which covers the universe of fixed rate, non-investment grade debt.  Cumulative daily total returns for the period 1/1/2017-12/31/2017, data sourced from Barclays Capital.
2  Based on the Bloomberg Barclays U.S. High Yield Index.  Annual total returns for the period 1/1/1987-12/31/2017, data sourced from Barclays Capital.
3  Based on the Bloomberg Barclays U.S. High Yield Index.  20-year average return number based on annual total returns for the period 1/1/1998-12/31/2017, data sourced from Barclays Capital.
4  Equity index referenced is the S&P 500, which had a total return from 12/31/15-12/31/16 of 11.95% versus a Bloomberg Barclays US High Yield Index total return of 17.3% for the same period.
5  Acciavatti, Peter D., Tony Linares, Nelson R. Jantzen, CFA, Rahul Sharma, and Chuanxin Li, “2016 High-Yield Market Monitor,” J.P. Morgan, North American High Yield and Leveraged Loan Research, January 2, 2018, p. 9, https://markets.jpmorgan.com.
6  Jantzen, Nelson, CFA and Peter Acciavatti, “JPM High-Yield and Leverage Loan Morning Intelligence,” J.P. Morgan North American Credit Research, 1/4/18, 10/25/17, 6/23/17, 4/1/17, and 2/6/17, https://markets.jpmorgan.com.
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