High yield bonds are opening better today, with the Bloomberg Barclays US Corporate High Yield Index down -0.8% yesterday*. The lack of new supply and the easing of the 10-year US Treasury yield has kept a bid under the secondary market. There was also a small inflow yesterday of $168M into high yield mutual and exchange traded funds that has to find a home. No high yield bond new-issues priced yesterday, but there are ten on the forward calendar for ~$10B. Month-to-date issuance has been only $5.8B, well below the 10 year average of $16.6B for June.
The widely popular Fallen Angel high yield strategy has taken it on the chin in 2018. With the underlying strength in corporate America and the US economy, we are currently seeing the number of rising stars outpacing fallen angels, which may limit inventory of fallen angels going forward.
On the high yield bond passive-index tracking strategies, they are stuck in a tough place. We have had a strong high yield new issue market over the past several years, meaning many of these bonds were issued when the 10-year US Treasury was much lower. We saw a number of bonds being issued with a 3 ½% – 5 ½% coupon rate, but now that comparable size/rating coupons are generally demanding higher yields upon issuance given the move in Treasury rates. However, given these passive strategies primarily mirror what is part of the underlying indexes, the index-tracking ETF’s and mutual funds are stuck holding this low coupon debt—they don’t have the mandates to sell based on the low yields, and we don’t expect these companies to refinance anytime soon given where rates are now.
The tariffs war talk is starting to ease, as Germany has hinted they might take down tariffs on US goods. With their PPI coming in a bit stronger, at just 0.5%, beating the 0.4% estimates, I think they want to keep that momentum going.
Want to take some risk and put your money in foreign debt? Two of the biggest corporate bond defaults this year are in China and there is talk that investors in Venezuela’s government bonds may get a big fat $0 for their investment. Remember, high yield bond and loan issuers tend to be more domestic-focused, as they are generally not large multi-national companies; thus, the tariffs and tax changes may affect them much differently. We believe this is why an active manager like Peritus, whose portfolio managers have been managing high yield debt for over two decades, is a good option.