The high yield bond market is opening this last week of the second quarter weaker, along with equities. The Bloomberg Barclays High Yield Index was up 0.01% on Friday.*
The OPEC meeting has come and gone and with an outcome of a bit of an increase in production but only enough to meet the increase in supply needs. Syncrude, a big Canadian supplier of heavy crude to Cushing, is down until late July because of a lack of power. Also, with issues in Venezuela, Libya and Angola OPEC feels a need to cover that lost production. Additionally, with new sanctions about to enter the Iran discussion, their production could wind down as well.
Only one high yield bond new-issue came to market on Friday and that brings the MTD total to 15 deals for $7.8B in proceeds. This is well below normal and with the holiday week next week, I don’t expect this to pick up even though there are eight deals for ~$3.8B on the forward calendar. Estimates for high yield bond new-issuance for 2018 continue to be lowered as Bank of America Merrill Lynch again lowered theirs to $238B from $245B. High yield bond mutual and exchange traded funds saw -$232M exit the asset class in the latest week ending June 20 according to Lipper. Loans continue to see inflows.
I will continue my rant on the need for active management in the high yield bond market going forward, as I believe that is necessary for those looking to add alpha to their portfolios. The yield curve between the 2-year Treasury and the 10-year Treasury is at the lowest spread since August of 2007. Many index tracking funds are filled with the largest issuers (by design) and are often stuck holding much of the low coupon paper that was issued in recent years that we don’t expect to be refinanced anytime soon as rates have risen. As an active manager we have the flexibility to avoid that low coupon paper and seek to generate income and absolute returns above what the relevant index offers (such as the Bloomberg Barclays US High Yield Index). We believe that finding ~100 securities in the nearly $3 trillion high yield bond and floating rate loan market that are in line with our strategy of seeking to provide investors with alpha is very doable in this landscape.
Peritus I Asset Management, the sub-advisor to the Peritus High Yield ETF (HYLD), www.hyldetf.com, fund distributed by Foreside Fund Services, LLC. For questions, please contact Ron Heller, CEO of Peritus I Asset Management, LLC at firstname.lastname@example.org, 805-879-5620.