High yield bonds are bucking the trend today by being a bit higher while equities and oil are lower. The Bloomberg Barclays US Corporate High Yield Index was up 0.10% yesterday.* The continued worry of how tariffs across our fellow trading nations has markets mixed. It’s interesting how so many say renegotiating tariffs are bad for the US, but if you look at auto tariffs, the EU has a 10% tariff on imported US cars while the US has only 2.5%, so it seems that any rational person would see this needs to be balanced.
High yield issuers generally do not have as much exposure to these issues are they are more domestically focused companies, whereas the higher rated investment grade issuers often have more of this exposure given their more international focus. Given investment grade issuers are also much longer in duration and carry smaller coupons, we believe this asset class has more potential downward pressure.
Despite consumers spending more than expected, wages did not exceed estimates which draws a conclusion that they spent savings or purchased on credit instead of using additional income, which is putting pressure on equities. The Fed Beige Book remained positive and it pointed out that unemployment is so low that convicted felons are now being recruited for jobs, which in turn has heated up discussion on welfare reform, as many argue that the current system does not properly incentivize people to work.
Given the volatility in the markets, especially the Treasury market, there were no high yield bond new-issues yesterday and only two on the forward calendar. There were more outflows from high yield bond mutual and exchange traded funds yesterday and a small outflow from floating rate loan funds, which was the first in a while.