High Yield Daily Update

The high yield bond market finished higher yesterday, with the Bloomberg Barclays US High Yield Index up 0.09%*,  and is opening firmer today, but is generally quiet as the Fed concludes their meetings today with what everyone expects is another quarter basis point increase in the Federal Funds Rate.  The longer end of the Treasury curve doesn’t really care as the 10-year US Treasury yield still sits at 2.95%.  The Treasury curve has not moved today even though the PPI numbers came in hotter than expected.  The big question being thrown around is will these higher business costs be passed through to the consumer as seen in the CPI numbers earlier in the week?  Will that in turn slow consumer spending because prices are outpacing wage growth?  Regardless, as an investor you need to answer those questions and then make your investment choices.  These are things that the Peritus team considers when allocating money to an industry and security.

As we have been saying, the high yield bond market is generally in pretty good shape as witnessed by recent comments from Moody’s whereby their survey of non-financial companies found that 65% of them were better off with the 2017 tax cut and they expect to use additional cash to repay debt and, to a lesser extent, repurchase stocks.

Small inflows continued yesterday into both high yield bond and floating rate loan mutual and exchange traded funds and it looks like tomorrow’s weekly totals for high yield bonds will tilt slightly to the negative, as there were sizable outflows late last week. The high yield bond new-issue market has been quiet as no deals priced yesterday and there are five deals on the forward calendar for ~$3.5B. There are some big M&A deals coming down the line but we believe that investors need to be careful as some of these deals will be highly leveraged.  Many of these will go into indexes and thus the index-tracking ETFs.  If you go back to some of the large M&A deals done in 2006/07 many of those faced financial stress and/or went into bankruptcy in the years following issuance.

The Bloomberg Barclays US High Yield Corporate Index average spread closed at +335bps over the comparable maturity treasury and nearing that 10.5 year low of +332 hit on Jan. 26.*  You cannot directly invest in an index, so investors need to consider the additional fees and trading costs embedded in ETFs and mutual funds.  Additionally, within the existing high yield market, there are some securities that don’t produce a lot of yield and currently we are seeing that in some of the larger, on-the-run names that are loaded in the various indexes.  Active managers like Peritus have the flexibility to pick and choose the securities in the industries that we believe will do well in this environment, with the goal of adding alpha via coupon yield and total returns as compared to the indexes.

* Bloomberg Barclays U.S. Corporate High Yield Index covers the universe of fixed rate, non-investment grade debt (source Barclays Capital).  Return data for 6/12/18.  Spread is the listed “average spread” over the benchmark for the dates 6/12/18 and 1/26/18.
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