High Yield Daily Update

High yield bonds are a bit weaker today on a higher 10-Year Treasury yield, touching 2.95%, which is a four year high.  Debate rages on about how many hikes the Fed will undertake this year after their minutes came out yesterday, but some Fed Governors are talking about a more gradual rate move as they claim inflation is “running a little behind target.”  There were four more new-issues that came to the market for $1.5B and another half dozen in the on deck.

Small inflows have reversed a few weeks of big outflows. The JNK and HYG ETFs are now seeing flat activity after losing approximately 37% and 17% of their asset base since Jan 8th.1

It doesn’t seem like much has changed in the high yield secondary market over the past few months but according to JP Morgan, BB-rated bond yields in their index bottomed in Oct at 4.09% and are now 4.94%. Also of note, currently $101bn (8%) of US high yield bonds yield less than 4%, down from $393bn (32%) in Oct.1

1  Jantzen, Nelson, CFA and Peter Acciavatti, “JPM High-Yield and Leverage Loan Morning Intelligence,” J.P. Morgan North American Credit Research, 2/22/18, https://markets.jpmorgan.com.

High Yield Daily Update

High yield bonds are a bit weaker in the secondary market today, along with oil and gold.  Yesterday saw a down day led by energy, as another oil glut is feared, and by fears of a rising 10-year Treasury yield continuing.  Oil is a big story, the combination of record US production and the rising dollar could potentially cause another glut, something producers have been looking to avoid.  The 10-year now sits at 2.9%.

Two new issues for $3.5B in proceeds came to market yesterday, making it the first primary market activity in a week.  The forward calendar has four issuers trying to get to market today with another dozen lined up for the rest of the week.

Within the high yield market, we continue to see a solid fundamental backdrop. Moody’s is forecasting the global speculative grade default rate to fall to 1.7% by the end of 2018 from 2.9% in 2017, which we see as another sign of a healthy and improving corporate environment.

High Yield Daily Update

High yield bonds were down a bit yesterday, as all markets remain volatile, and are a bit weaker again today.  Despite the volatility and the big swings in the 10-year Treasury yield, three new-issues priced yesterday for $1B in proceeds. There are still a half dozen on the calendar with more lining up behind that.  Even with oil lower for a fifth straight session, energy names are leading in the new-issuance category.

Loans continue to have inflows, but how long will this last?  We believe the loan funds may face an issue going forward.  To provide liquidity for redemptions they generally have a credit facility in place to fund cash redemptions until loans can be sold.  The cost of these LOCs may be going up pretty dramatically as Libor rates are rising, as are Treasury yields.  This can cut into the returns of the loan funds if there are elevated redemptions, thus something we believe investors should consider as they look to hedge their interest rate risk.

If rates continue to rise, we don’t believe you should fret, as high yield bonds have historically been a good place to be positioned (see our piece, “High Yield in a Rising Rate Environment”).  In an environment of rising earnings and a strong economy, we are seeing a low corporate default rate environment and Moody’s has reiterated this again this week.  The new-issue credit markets are open as there remains a demand for yield.  Insurance companies and pension funds are the two industries that suck up the most demand for high yield and that is not going away in our lifetime.

High Yield Daily Update

I don’t remember the stock market doing this after we (SF 49ers) upset the Cincinnati Bengals in Super Bowl XXIII.  All is well because I bought a house here in Santa Barbara with my Super Bowl check, did pretty well with that investment.

Volatility is back, just ask Velocity Shares with their Inverse VIX product.  What do you do when there is volatility like we have seen?  The volatility in the high yield bond market has been much less than the volatility we have seen in equity markets, but the market prices of many high yield ETF’s have traded well below NAV’s during the past few days.  For investors concerned about the recent market weakness, what should you do?  We believe you should look to what the issues are that are causing the market decline.

In 2008 when the high yield market started to fall, and virtually every bond was falling at that time, there was a reason.  There was uncertainty as to which companies, especially the banks, were going to be standing when the dust cleared.  The economy was weakening, and with that demand.  As an active manager we looked the individual credits that we held, discounted their financials to stressed levels and figured out if the security prices at the time reflected reality of failure.

Here we are again faced with some volatility (though certainly to a MUCH lower extent), but when you look at the catalyst you look to the cause.  It appears the main driver is a better economy (leading to higher wages and maybe inflation) THUS POSSIBLY HIGHER INTEREST RATES.  If rates are going to creep higher where do you want to be?  What kind of asset allocation do you want?

High yield bonds have historically performed well during rising rate environments because of several factors, including higher coupons and lower durations, which can serve to provide some protection against rising rates (see our piece, “High Yield in a Rising Rate Environment”).  Additionally, with our own active strategy, we have the ability to turnover holdings and take advantage of potential opportunities such as reinvesting in some newer issues that have come to market with higher coupons that have been adjusted upward to keep in tune with rising rates.

In this environment we see the economy is improving, companies are doing well, and defaults are near historic lows, so we do not see a lot of risk to the downside.  You add in still low government bond yields around the world, and we believe the demand for high yield debt is here to stay.  When we get volatility, don’t panic; rather that can be an opportunity to dollar cost average.  We believe investors should look to an active manager, like Peritus, who has the flexibility to add to positions and turnover investment holdings to more effectively position themselves for the specific investment opportunities they see in the current market environment, rather than the large mutual funds and ETF’s out there holding hundreds or even over a thousand individual credits.

High Yield Daily Update

High Yield finished Friday flat and is opening this Monday slightly weaker as the 10-year Treasury rises to a three year high of 2.71%.  Only one new-issue priced on Friday but this week’s calendar is active with six deals already on the docket.   High yield bond weekly reporting mutual and exchange traded funds saw another -$1.13B outflow in the week ended 1-24-2018, after -$3B the prior week.  It looks like much of the outflows are coming from the longer duration index tracking funds.  Moody’s Liquidity Stress Indicator kicked off 2018 with a new low of 2.4% as of mid-January as many junk issuers are experiencing steady economic growth and healthy credit markets.  Moody’s US speculative grade default rates are forecast to drop to 2.4% by the end of this year from 3.3% in December 2017.

We believe that high yield investors should not fear rising rates like they should in some  other asset classes and the reason is multi-fold.  One, as new-issues come to market in a rising rate environment the coupon and new-issue price will reflect this new, higher Treasury rate.  Additionally, high yield bonds have historically outperformed certain other fixed income asset classes in rising rate environments, helped by their higher coupons and shorter maturities and with that less correlation to increases in Treasury rates.  For a more detailed analysis see our recent commentary, “High Yield in a Rising Rate Environment.”

High Yield Morning Update

High yield bonds and loans are better today, despite the rise in Treasury yields and outflows from bond funds.  Lipper reported that high yield bond mutual and exchange traded funds had an outflow of -$1.13 billion and floating rate loan mutual and exchange traded funds had an inflow of +$477 million for the weekly reporting funds for the week ending January 24th.

President Trump’s speech this morning in Davos is fueling a positive tone today as equities, oil and gold are all up despite a weaker than expected GDP post. Offsetting this was lower inventory levels and higher personal consumption.  Fueling some of the equity rally is the Intel earnings beat and that is pulling up the rest of the semiconductor space.  Biotech is also strong on a lot of M & A happenings.

High Yield Daily Update

The high yield bond market finished better yesterday but is flat this morning, as are yields on various Treasury bonds across the curve, with the exception of the 30-year Treasury, as the yield there is down to 2.9%.  Three new-issues hit the market yesterday to the tune of $1.07B in proceeds and there are another half dozen building in the pipeline.  One must be careful in security selection, as the loan market had a record issuance of covenant-lite paper in 2017.  Covenant-lite is when a loan has more bond-like covenants, which provide weaker protections for the lender.  As inflows continue into the index tracking loan products this week, investor should be aware of the companies they are buying rather than just simply searching for a hedge against rising rates.  This is important when a company enters troubling financial times, when those financial maintenance covenants would become more relevant.

Oil has hit a 37-month high on record stockpile drawdowns.  It will be interesting to see how many rigs continue to come on board as the better technology that has been developed has made the shale drillers much more efficient and profitable.  Despite the extreme cold weather across the US, natural gas has not done much, too much supply and drilling in this space.

High Yield Daily Update

I’m back in my seat after spending a few days at the Inside ETF Conference.  The conference was pretty upbeat despite the run we have seen in equities.  The consensus is that the economy is going to grow at a pace above what we have seen the last decade, although it will not be a run-away economy where the Fed will have to put the brakes on it.  It was interesting to hear a few industry leaders cite what we have also said the past few years, which is that even though regulations and lower taxes will be helpful, we are still in an environment of QE overseas and face the demographic issue of massive amounts of the world’s population retiring, thus likely reducing consumption/spending in many areas.

As per high yield, all of the fixed income panels I attended seemed to feel the same way, there doesn’t appear to be any fundamental issues that will disrupt the bond and loan markets, even though spreads are at levels that have spelled otherwise in past cycles.  A few have cited that they were shifting their portfolios to higher quality as they feel that spreads may widen out a bit in 2018 but they also said that is causing duration indigestion (higher quality often has longer maturities and lower yields) as they feel the 10-year Treasury will creep up a bit more and they fear falling behind other managers as they will be losing coupon income as higher rated companies often have lower cost of debt.

Overall, my take was that most of the consensus was that investors should be in active management in 2018 because the expectation seems that the index-tracking products will likely only produce coupon income, with little to no upside in capital appreciation given where much of the index names are trading.  Retail investors may be listening as outflows continue with the majority coming out of the index-tracking high yield ETF’s.  The weekly number by Lipper will be out tomorrow after the close but it looks like another big week of outflows.

Oil is hitting a 37-month high giving investors a comfort in those credits. Large on the run names are a bit weaker today, while the rest of the market is unchanged and we believe is a bond picker’s world.  As we go through earnings season, we believe you better get them right as the volatility is still there on a name by name basis.

For information on the AdvisorShares Peritus High Yield ETF (ticker HYLD), the actively managed high yield exchange traded fund that the Peritus team is sub-advisor to, please visit, www.advisorshares.com/fund/hyld, distributed by Foreside Fund Services, LLC.

High Yield Daily Update

High yield bonds finished lower yesterday fueled by large outflows from the retail sector.  Lipper reported an outflow of $3.1B from weekly reporting high yield mutual and exchange traded funds, the largest in nearly a year.  Reportedly, $2B came from high yield ETF’s and $1.1B from mutual funds.  A small inflow into high yield floating rate loans was fueled by the rise in the 10-year Treasury as it hit 2.64%, the highest level since September of 2014 but is well below the high of 3% that was touched earlier that year.  Speaking to the state of corporate America, “Fallen Angels” were at the lowest level in three years in 2017 with just $16.3B moving from investment grade to high yield. In 2016 we saw $66.4B and 2015 had $45.5B in bonds downgraded to high yield.1

For investors seeking returns that outpace the various high yield indexes, we believe that you should look to find an active manager like Peritus that has the ability to add alpha by selecting securities that trade below their projected take out price.  Additionally, within the floating rate loan market, 76.3% of the loan index trades above par, which is approaching March 2016’s multi-year high (of 76.4%),2 thus we believe your manager must also be able to do fundamental work to determine which of these loans trading at a discount to par will provide that alpha.  We believe that simply buying an index is not going to protect you and add a lot of value to your portfolio.

1,2  Jantzen, Nelson, CFA and Peter Acciavatti, “JPM High-Yield and Leverage Loan Morning Intelligence,” J.P. Morgan North American Credit Research, 1/19/18, https://markets.jpmorgan.com.

High Yield Daily Update

High yield floating rate loan investors are proving fickle as money is slowing filing back into retail loan funds as rates on the longer end are rising a bit.  The 10-year Treasury is touching the 2.63% level that was the 2017 peak, but is far below the one day hit at 3% a few years ago.  The high yield bond market was largely flat yesterday, with the exception of a number of LCD’s flow-name bonds which were down slightly and opening a touch lower today on continued outflows and continued strong economic outlook putting rate rise fears at the forefront.  Many don’t understand that high yield is one of the better positioned fixed income asset classes in that environment because of their higher coupons and shorter durations relative to many other fixed income options.  To see our analysis on rising rates, read our piece “Strategies for Investing in a Rising Rate Environment.”

Four new-issues priced yesterday for $1.55B and there are an additional handful of the calendar.  As retail investors are taking money out of the high yield bond market it appears there is a nice bid to the market, especially in the new-issue market from pensions and endowments as they adjust their 2018 models.  The continued need for yield to meet expenses is only growing, which we believe should keep a bid in this market.  This big demographic change will not go away any time soon.