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.

High Yield Daily Update

The high yield bond market kicked the week off with a positive day yesterday despite the volatility in equities.  Today, the high yield market is mixed, with the big flow names weaker and off the run names remaining solid.  Last week we saw the new-issue market bring 11 deals for $7.3B in proceeds, and yesterday we kicked off this week with four deals for $2.35B in proceeds, with all of these deals were well oversubscribed.  The forward calendar is steady and building.  Moody’s Liquidity Stress Test Index kicked of 2018 with a new low of 2.5%, which we believe points to a positive economic and credit market environment.

Despite outflows from the asset class, there is still a lot of cash on the sidelines looking for yield.  Given the continued low rate environment and the record numbers of the world’s population entering retirement age, we believe that the demand for US Treasury Debt will be strong, as well as demand for other fixed income debt such as high yield.

High Yield Daily Update

The high yield market was higher yesterday following the lead of equities, while the 10-year Treasury yield ticked up to 2.45%, rubbing up against that technical ceiling so many are watching.  S&P reported the US speculative grade default rate ticked down to 3% in December from 3.1% in October and November.  This is predicted to keep going lower as 2018 progresses.

Lipper reported $186M of inflows into high yield mutual and exchange traded funds for the week ending January 3rd fueling the secondary bid as the new-issue market is slow out of the gate in 2018.  This is the first inflow in four weeks.  On the floating-rate loan front, loan funds reported their 20th outflow in the past 23 weeks, according to Lipper.

Even though this morning’s Jobs number came in light from a headline perspective, we believe it was really a decent number when you look at the adjustments from the hurricane season and the adjustments by retail.

For the third year in a row we believe 2018 is going to once again be the year of the active manager.  Active managers work to add alpha for investors via producing above index yields/distributions to their clients/shareholders as well as potential capital appreciation as active managers like Peritus have the ability to sell/swap securities when they believe they are fully valued rather than having to wait until there is a call, maturity or take out event.

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

Calm has returned to the markets and NYC following a failed pipe bomb explosion.  It looks like the only one hurt was the idiot himself.  Turning to markets, the high yield new-issue market was alive and well last week, with $10.48B pricing over 21 deals, fueled by the second straight week of inflows to the tune of $217M for the reporting week ending December 6th.  This week looks like a Holiday week with only four leftover new-issues on the table.  It has been a record year for new-issuance in investment grade as spreads are a bit tighter at the end of the year from where we started in 2017.  The Fed meets this week and it’s expected that another ¼ point rate hike is in order.  Today the 10’s and 30’s of the Treasury curve are lower in yield, pointing to yet another period of yield curve flattening.

Looking into 2018, we don’t see any major changes to what happened in the high yield market this year; currently we believe the high yield market is positioned for generating the coupon income plus a little capital appreciation potential.  We have seen others, such as Northern Trust, come out with a similar view.  We and others don’t expect to see a major selloff.

Investors still need income and given where Treasuries are and where we believe they are most likely going to be in 2018, we continue to believe that the tangible high income provided by high yield debt is attractive for an investor’s portfolio.

High Yield Daily Update

High yield was slightly better yesterday and opening up the same today.  With so many saying high yield is teetering on a big correction or a collapse, the underlying market does not show this nor does the health of corporate America.  Moody’s is projecting continued declines in corporate default rates over the next year and the covenant stress index declined to 2.3%, suggesting a low risk of issuers violating financial maintenance covenants.  So where is the stress, other than in certain securities but that is ALWAYS the case?  If the market was in trouble then the new-issue market does not show it, as six deals for two billion in proceeds came yesterday with two thirds of that were CCC rated and another was a PIK.

The biggest uncertainty is with the new Fed and their rate direction as Yellen and Dudley are stepping down.  Even if the long end rises, we believe the asset class to be in is high yield corporates, with their larger coupons and lower durations, see our paper “Strategies for Investing in a Rising Rate Environment.”

High Yield Morning Update

Risk is back on in a big way today as people wake up to learn the sun did come up and there is no crisis going on, just some profit taking and rebalancing.  High yield is higher as that need for yield did not disappear and we don’t anticipate it will during our lifetime.  More outflows from the asset class are making it a buyers’ market, as secondary paper is looking for a bid while the new-issue market is attracting the cash.  There is expected to be a several billion dollar outflow number for the latest week when Lipper reports after the close today.  High yield bonds have sold off much more than loans during this recent period of volatility and that’s why we believe it is beneficial for us, and our investors, that we have the flexibility to allocate a portion of our active strategy to loans.  Some less volatility with what we see as still attractive tangible yield is always good to complement to our high yield bond allocation.

The focus today is on the tax bill vote and there are many different opinions on how this bill could impact the high yield market as there are potentially limitations to the deductibility of interest yet the corporate rate will be lowered, so to us this will be a company by company analysis and not an overall market call as each company is different in how they issue debt and what tax bracket they will be in per their profit generation.

High Yield Morning Update

As I read the morning news from many, many different sources as I do every morning all I hear lately is “Is This the End for High Yield?” but what does that mean?  The end meaning Madoff, Bear Stearns or the structured vehicles (mortgages) that all blew up during the financial crisis?  We certainly don’t see any of these systemic issues on the horizon.

So how should investors look at the high yield market today?  You need to first look at the overall economy and the health of corporate American, and then look to the industry and health of the company you are loaning money to, whether it be in the form of a bond or loan.  The high yield market is made up of companies, many of which provide essential products and services to all of us.  When there is an end to a high yield issuer it is often because the management has mismanaged their capital structure or their product or service is no longer in demand as it once was (competition or a new buggy whip replaced it).

In the current high yield market you have expensive prices on many securities, but we don’t see a broad based credit crisis emerging.  You have had money flowing into a variety of yield products because investors often want to be diversified into different asset classes.  The good and the bad of managing yield products is that money flowing in has driven up prices and thus created nice returns, but have also made many securities overvalued to their call or maturity prices or to the credit metrics, and thus they understandably correct at some point.  We believe investors need to understand that new-issue are being brought to the market each day to refinance existing debt, and this refinancing can be done at a call price which may well be below the trading pricing of the security prior to the refinancing announcement.  Thus understanding the call schedule or the ability to evaluate the prospects of a bond being tendered at a price above the call/maturity price is important.  This sort of strategic investing involves active, not passive management.

As an active manager, Peritus targets an above index coupon and yield-to-worst with their strategy and the potential for alpha generation for investors.  Yes, index/passive investing might be less expensive, but we believe that you get what you pay for over time. We believe that being in the right credits is important.  But we also believe that being invested is important as perfectly timing the market can be difficult.  If you are someone that has an expertise in timing the market, good luck as I believe it has been proven that over time the returns are less because following a correction, the snap back can be faster than the market timers emotions allow them to step back in—so they could miss the move.

Turning to the specifics for the market today, we see the high yield market lower again this morning along with equities and oil, as the money looks to be going into longer Treasuries with the 10-year down to 2.34% from 2.4% just a few days ago.  Oil is lower as there is a report that US shale will be equal in size to the Saudi’s in a few years and the IEA reporting a less bullish demand growth outlook for 2018, along with the API reporting a build in oil inventories rather than a draw down as had been expected.

Even with some pricing weakness and outflows, there were seven new-issues that priced yesterday in the high yield bond market totaling $4B.  There are ten new-issues on the forward calendar, so this does not look like an end to high yield.  Rather to us, it looks like an opportunity to add to your positions.  We are seeing some of the strategists at the banks come out with expectations that investors will to continue to seek exposure to high yield and suggests that riskier segments of the market have seen tighter risk premiums around similar points in the credit cycle in the past.

High Yield Morning Update

The high yield corporate debt markets are lower again today along with equities on the back of a stronger than expected PPI number and a shift to shorter-dated, higher rated securities.  Oil and most other fossil fuels are dramatically lower today in the face of the recent headlines that the IEA sees the US shale surge as the biggest oil and gas boom in history. You have the conundrum of OPEC pairing production yet shale is booming, with oil now here in the mid $50’s.  All eyes and ears are on a conference featuring the world’s most powerful central bankers that kicked off in Frankfurt.  The new Fed Chairman is skeptical on the interest-rate dot plot currently being forecasted by Chair Yellen.

No deals priced in the high yield market yesterday as one deal was pulled because of weakness in the market, thus meaning they would have to pay more to get it done.  There are twelve new-issues on the forward calendar.  We will see what demand there is as there is still a need for yield but with some outflows happening and weakness in the secondary market, these could take a few days to get to the market.

We believe that corporate America is in good shape as witnessed by all the earnings we are seeing and by Moody’s recently reported Liquidity Stress Index and their default outlook.  We believe this recent price weakness in the high yield market is simply investors moving money around, and it will likely eventually find its way back.  We continue to see opportunity with active vehicles, as many of those are positioned with a notably higher dividend and yield than many of the index-tracking products.

High Yield Daily Update

The high yield corporate debt markets are a bit lower to start the week on outflows from mutual and exchange traded funds to the tune of $622M for week ending November 8th, making it two weeks in a row of outflows.  There appears to be profit taking in high yield and a switch to higher rated securities, as witnessed by outflows from the high yield index-based ETF’s and inflows into the investment grade and Treasury ETF’s.  We also saw equity markets down last week, as both equities and high yield have steadily risen over the year, with the S&P up 16.9% and Bloomberg Barclays High Yield Index up 7.5% for the first 10mos of the year.1  We believe the strategy should be to stay invested to collect the income generated by high yield corporate debt, but a bit of market weakness can create an opportunity to dollar cost average to buy bonds and loans at lower prices.

Oil was higher again last week on the back of OPEC still cooperating in production curbs, while the rig count went down.  Oil is flat today with an increase in rig count in the latest release.  OPEC estimates global oil demand growth of 1.51MMb/d which is up 130kb/d from last month’s report, with China continuing to lead the growth side of the equation.2

There were nine deals for $3.4bn that priced last week while there are another dozen on the forward calendar. Some of these new-issues have weakened post trading; we believe you still must be selective and understand the indicated demand for each deal.  Moody’s expects the global speculative-grade default rate to decline to 2.1% over the next year, which we believe indicates a continued positive outlook for high yield bonds.

Many ask about our opinion on Treasury yields and where they are headed.  We continue to point to the huge demographic change in population around the world, which we believe creates headwinds against world GDP growth and inflation, and continued QE going on in many countries—all of which we believe serves to moderate rate increases.  If you go back and read past publications on our website, www.peritusasset.com, you will see at the beginning of 2016 we called for lower long-term Treasury rates, rather than a sizable move higher as many had projected. What has happened to the yield curve in 2017?

From two years to 10 years: 72 basis points, down from 125

From two years to 30 years: 119 basis points, down from 187

From five years to 10 years: 33 basis points, down from 52

From five years to 30 years: 80 basis points, down from 114

1  Bloomberg Barclays Capital U.S. High Yield Index covers the universe of fixed rate, non-investment grade debt (source Barclays Capital). The S&P 500 Index is a broad-based, unmanaged measurement of changes in stock market conditions based on the average of 500 widely held common stocks. S&P 500 index data sourced from Bloomberg, using a total return including dividend reinvestment. Data as of 10/31/17.
“OPEC Monthly Oil Market Report,” http://www.opec.org/opec_web/static_files_project/media/downloads/publications/OPEC%20MOMR%20August%202017.pdf, November, 13, 2017, p. 30.