After the Bloomberg Barclays US Corporate High Yield Index returned 0.13% yesterday*, the high yield bond market is weaker today being driven by oil, which is down $2.50 as we speak to $68.25. Many oil exploration and production credits are weaker, as are the pipelines and servicers. Was there a leak of President Trump’s stance on Iran? One high yield bond new-issue came to market yesterday; the calendar continues to be light as many companies are issuing loans in place of bonds.
Jamie Dimon was in the news recently claiming the 10-year Treasury yield was heading to 4% if the Fed keeps raising the Fed Funds rate and reducing stimulus. This is hard to see as so many different factors weigh on this take. The huge overhang of demographics is a negative as record numbers of baby boomers are moving into retirement, and US treasuries are yielding much more than Germany sovereign debt and the sovereign debt of most other developed countries, so we believe demand for US Treasuries will remain. Additionally, if you look at what 4% would do to our government debt servicing costs, as well as mortgage rates and how that would kill the housing market, we would expect that to be a consideration for the Fed as they take action.
Regardless of what happens, the high yield bond market has historically done well in rising rate environments, and coming off this incredibly low yield period, we believe that active management in the high yield bond and loan markets are key. Read more about how the high yield market has historically performed in rising rate periods in our recent piece, “Strategies for Investing in a Rising Rate Environment.”