While the Bloomberg Barclays US High Yield Corporate Index was flat yesterday, up 0.02% on the day1, today we are seeing the high yield bond market a bit weaker following the lead of the equity market. We aren’t seeing this as a risk-off trade as everything including oil, gold, and Treasuries are down. One new-issue priced yesterday with three on the docket for today, leaving three for the balance of the week.
We have seen reports that US-listed fixed-income ETFs have seen inflows of $14.7 billion in April, positioning it as the largest month of inflows since October 2014, and this compares to $602 billion in total assets for all US-listed bond ETFs. This would indicate to us that investors are turning to fixed income, while we are seeing some weakness in equity markets. As per equities for those who invest there, rising earnings and the latest pullback in stocks have brought valuations down. Based on consensus estimates for the next 12 months, the S&P 500 Index PE ratio fell from 18.5 on January 26 to 16.3 as of April 272, which is a big move.
We believe that active management is the key to working to keep volatility at a reasonable level and produce consistent performance. If you look at the dividend yields on the index tracking high yield bond ETFs, we believe they will continue to underwhelm. As rates have been rising, these funds are stuck holding many securities that have coupons reflecting much lower Treasury rates, as much debt was issued when the US 10-year Treasury was yielding about half of what it is yielding today.