High Yield Daily Update

The high yield bond market was better yesterday but all eyes are on the Fed press conference today.  Recent inflows into high yield mutual and exchange traded funds have added cash bids to both the new-issue and secondary markets.  Three smaller-sized new issues priced yesterday for only $625M in proceeds, while another half dozen are on the forward calendar.

Oil is over $50 per barrel today while the Treasury long-end has a small rally, with yields down a tad.  What to see some yields on various 10-year government bonds around the globe?

US  2.23%

Germany   0.4%

Japan   0.0%

Switzerland   -0.1%

As per high yield bond market yield levels, take a look at the two JP Morgan’s High Yield Indices:1

JP Morgan European Currency HY – 3.28% yield-to-worst

JP Morgan US HY – 5.92% yield-to-worst

We believe the moral of the story is that you need to be an active investor to unlock value above average index and risk free returns.  The world is not growing much as witness by those government bond yields and with demographics playing against it, commingled with Washington, DC gridlock we believe we will remain in this subdued state.

1  Jantzen, Nelson, CFA and Peter Acciavatti, “JPM High-Yield and Leverage Loan Morning Intelligence,” J.P. Morgan North American Credit Research, 9/20/17, https://markets.jpmorgan.com.

High Yield Daily Update

High yield bonds are following yesterday’s lead by having another positive day. While Treasury yields are creeping back up from their YTD lows, the hunt for yield is not and will not go away.  Oil is a touch lower but is near a seven week high and is up in eight of ten sessions, while gold is a touch higher as stocks continue their grind higher.  Energy names are leading the high yield market higher, with a few names showing up on the stock IPO forward calendar.  Two new issues priced yesterday and there are still eight more deals on the forward calendar.  Additionally, Toys R Us filed Chapter 11 yesterday as the retailers keep struggling.

As we close out the third quarter there is a lot of chatter about the bank corporate earnings and how will fixed income trading rules impact them.  The government tied their hands with the Volcker Rule inside of the Dodd Frank regulations.  There is still trading taking place, but the margins for these guys have eroded.  Outside of supporting their own deals with their capital in the new issue market, we see little in the way of activity other than taking orders, and there are minimal margins there.

We believe that there is still attractive yield out there but investors need to understand where to find it.  So many have gone to the lower cost, index-based products, but we believe they have also given up notable yield and potential total return opportunities by doing so.  We have recently written about the high yield indexes, to help people understand what is in an index and index based product in the high yield market, in our piece, “Understanding an Index.”

High Yield Daily Update

Now that Labor Day is over and the hurricanes have passed, we have “risk-on” for the financial markets as the stock markets have been in positive territory in seven of the last ten trading sessions.  Investors are selling Treasuries as we have seen the 10-year Treasuries go from a 2.05% yield to 2.17% today in a matter of days.  Stocks are up again today, as are high yield bonds.

The high yield new issue calendar is bulging with 14 deals on the calendar after pricing three yesterday for approximately $2B in proceeds.  Demand for not only new-issues but secondary high yield paper is there, as inflows into high yield bond mutual and exchange traded funds picked up last week and the need for yield is not going away.

We feel corporate America is in pretty good shape, as witnessed by the August close of the Moody’s Liquidity-Stress Index coming in at 3.4% versus an all-time low of 2.8% and Moody’s also expects the speculative grade default rate falling to 2.7% as we end the year, down from the July rate of 3.1%.

High Yield Morning Update

High yield bonds are weaker this morning on continued outflows.  Pressure is again being applied to the energy sector as the hurricane aftermath is weighing on the price of oil and oil related bonds.  The 10-year Treasury dropped to 2.11% this morning on the latest North Korea missile launch.

With that said we still see some value in individual high yield bonds and loans.  We don’t see much value in owning an index-based funds, as that sort of investment vehicle is not strategically positioned to take advantage of weakness in certain industries and securities within that industry that trade down for wrong or temporary reasons.  We believe that an active high yield portfolio can serve to provide tangible income streams and total return potential above what the general market offers.

High Yield Morning Update

High yield was flat and quiet on Friday and is opening the pre-Labor Day week much of the same.  No new-issues priced and there are none on the forward calendar until next week.  Outflows for the week ending 8-23 continue from both high yield corporate bond and floating rate loan exchange traded and mutual funds to the tune of $1B and $377M, respectively.

The hurricane is driving up gas prices and bringing oil prices down, as refiners are not operating meaning they are not producing gas and not burning oil to do so.  With the widespread flooding and what is expected to be nearly a week of heavy rain in the affected area, how does this impact food, restaurant, and retail outlets throughout the region?  We believe this is why you pay an active manager, to ask questions and assess the impact.

High Yield Update

High yield bonds and loans were mixed yesterday as outflows continue to dog the loan market.  Despite the “experts” Gundlach and Gross calling for higher 10-year Treasury yields, the 10-year continues to fall hitting 2.16% yesterday, down from a YTD high of over 2.6%.  Is this talking up their own book of trades or are they really tuned into the reality of demographics and the lack of real growth around the world?

We believe the outlook for high yield remains good despite the indexes being on the tight side of historical spreads over Treasuries.  Corporate default rates continued to decline, with Moody’s US speculative default rate closing 2Q at 3.8% versus 4.7% in 1Q. Moody’s expects the U.S. default rate to further drop to 2.4% a year from now.  Moody’s Liquidity Stress Index declined further in July to 3.3% down from 3.5% in June as it edged closer to its all-time low of 2.8% signaling fewer defaults.  Given this scenario and where the high yield index’s trade, we would continue to direct investors toward active management as we believe security and industry selection will be key to producing consistent returns going forward.

High Yield Morning Update

The high yield bond market was slightly better yesterday and flat today, while the new-issue market is essentially closed until after Labor Day.  Longer dated Treasuries yields continue to fall as the expectation is that any reform out of Washington DC likely won’t happen this year, thus we muddle along at 2 to 2 1/2% growth.

We believe the backdrop in high yield remains positive as the default rate keeps coming down and the continued strong liquidity stress index suggests corporations are still financially healthy, which we see as a good sign.  It is hard for investors to get their heads around current yields but we are still living in a slow growth, low Treasury yield world.  Until we see any kind of reform to spur growth or any kind of wage inflation, we believe the high yield market will remain boring and dull, but with continued coupon income generation and the potential in certain cases for some capital appreciation.  However, it is our belief that active management can be key in this environment as the ability to buy and sell selective securities may allow for potential distribution/yield and total returns above that produced by the indexes.

High Yield Morning Update

The high yield market traded higher on Friday despite Lipper reporting big outflows for high yield mutual and exchange traded funds for the week ending August 16th.  Only one new-issue priced on Friday and it looks like only one is on the docket, with that one said to already be 3x oversubscribed.  In the secondary market, high yield bonds are not all melting up like we have seen in recent history, as some credits are getting beaten up based on industry concerns or earnings misses.  We are seeing the market opening flat with the exception of the longer Treasuries, with the US 10-year Treasury touching 2.18%, as everyone is outside waiting for the eclipse.  Unfortunately we have June Gloom here in Santa Barbara so we won’t see the sun until late this morning.

High Yield Morning Update

High yield bonds have turned negative with equities despite oil, gold and Treasuries on the rise.  Flows were two way yesterday with high yield index ETF’s taking in a positive flow while high yield active mutual funds saw an outflow.  Dovish talk from our Fed and from the EU is dragging stocks lower.  As we enter the last two weeks of summer it should remain pretty quiet as most companies have announced earnings, the government is on recess again and the new-issue market will be quiet if history repeats itself.

Despite what some are saying about the high yield bond and loan markets, these markets still are generating higher yields than many other fixed income alternatives.  Additionally, while volatility is still present in individual securities and we believe that some securities are overpriced, we believe active managers have the ability to determine where there is value and what is a value trap in this market.

High Yield Morning Update

High yield is in rally mode today along with gold, stocks and Treasuries.  Weaker than expected housing starts, building permits and GDP growth in Europe is putting some water on the monetary tightening prospects by the Central Bankers around the world.

Three new issues came to the market yesterday with a half dozen more in the pipeline.  The new-issue market is performing well despite the CCC sector being down for eight of the last ten trading sessions.  High yield bond issuance is now over $200bn, and running ahead of what we saw last year.