High Yield Daily Update

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.

* Bloomberg Barclays U.S. Corporate High Yield Index covers the universe of fixed rate, non-investment grade debt (source Barclays Capital).

High Yield Morning Update

High yield bonds are opening weaker to start the week following the lead in the equity market.  The Bloomberg Barclays US Corporate High Yield Index was up 0.02% on Friday.1  A positive tone carried last week, even though oil was pretty weak, and the new-issue calendar was light so secondary prices held in.  There are seven high yield bond new-issues on this week’s calendar to start the week; we shall see if the positive cash follow into the asset class last week will eat this up or will investors take money out of secondary names to purchase.  The high yield market continues to see fundamentals improve with defaults continuing to trend below historical averages and leverage ratios declined for a seventh consecutive quarter to 4.19x, off a post-crisis high of 4.57x.2

Oil is up today and the US oil rig count gained one, bringing us to the highest count since March of 2015.  Oil is gaining as members of OPEC are now saying the plan for increased output is just 300k – 600k bpd, rather than the +1M bpd.

The 10-year US Treasury yield sits at 2.9%, while many expected it to hit 3.25% by now based on the curve steeping in response to the Fed raising the short end of the curve.  Could the opposite action be because of demographics we have cited over and over again and add to this the ECB hints that they will keep their rates lower for longer even after the stimulus ends?  Rates in the Eurozone were down a significant amount last week.  Keep an eye on the ECB forum in Portugal this week.

J.P. Morgan lowered their 2018 return forecast for the high yield bond market to 3.2% versus a prior 4.6% estimate.3  We continue to beat the active management drum here, as we believe that active managers like Peritus can add notable alpha by picking bonds and loans at opportune times in the most opportune industries, even in this low yield environment.

For information, including fund holdings and other statistics, 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.

1  Bloomberg Barclays U.S. Corporate High Yield Index covers the universe of fixed rate, non-investment grade debt (source Barclays Capital).
2  Jantzen, Nelson, CFA and Peter Acciavatti, “JPM High-Yield and Leverage Loan Morning Intelligence,” J.P. Morgan North American Credit Research, 4/27/18, https://markets.jpmorgan.com.
3  Jantzen, Nelson, CFA and Peter Acciavatti, “JPM High-Yield and Leverage Loan Morning Intelligence,” J.P. Morgan North American Credit Research, 4/27/18, https://markets.jpmorgan.com.

High Yield Daily Update

The Bloomberg Barclays US Corporate High Yield Index was up 0.09% yesterday* and high yield opened yet again a bit better, as I believe the steadiness of the 10-year Treasury yield holding right at this 2.95% level despite the Fed raising rates has calmed the market.  Even though the Fed raised its projection for four raises this year from three, the fact that the economic landscape and lower defaults projections from the ratings agencies is calming to high yield investors.  No high yield bond new-issues priced yesterday and there remains two on the forward calendar and two expected to price today.  Inflows into high yield bond mutual and exchange traded funds continued yesterday and we will see how the latest week ended up as Lipper reports after the close today.

Oil is up slightly today but Schlumberger’s profit warning spooked the market a bit as they said costs for getting rigs, personnel and equipment back up and running are higher than projected.  Combine this with lower oil prices of late and talk of a production increase by OPEC (1.8M bpb), here we are.

On the economic front, political fighting across European countries is causing an economic slowdown and has since made the ECB cut 2018 growth forecast to 2.1% from 2.4%.  Here at home, retail sales blew away estimates as tax refunds and lower tax bills helped fuel spending and this all added to increased consumer comfort.  Fuel costs were higher for the last reporting period, but oil has since come down so we will see if gasoline, jet fuel and diesel follow suit as those are often laggards.

* Bloomberg Barclays U.S. Corporate High Yield Index covers the universe of fixed rate, non-investment grade debt (source Barclays Capital).

High Yield Daily Update

The high yield bond market finished higher yesterday, with the Bloomberg Barclays US High Yield Index up 0.09%*,  and is opening firmer today, but is generally quiet as the Fed concludes their meetings today with what everyone expects is another quarter basis point increase in the Federal Funds Rate.  The longer end of the Treasury curve doesn’t really care as the 10-year US Treasury yield still sits at 2.95%.  The Treasury curve has not moved today even though the PPI numbers came in hotter than expected.  The big question being thrown around is will these higher business costs be passed through to the consumer as seen in the CPI numbers earlier in the week?  Will that in turn slow consumer spending because prices are outpacing wage growth?  Regardless, as an investor you need to answer those questions and then make your investment choices.  These are things that the Peritus team considers when allocating money to an industry and security.

As we have been saying, the high yield bond market is generally in pretty good shape as witnessed by recent comments from Moody’s whereby their survey of non-financial companies found that 65% of them were better off with the 2017 tax cut and they expect to use additional cash to repay debt and, to a lesser extent, repurchase stocks.

Small inflows continued yesterday into both high yield bond and floating rate loan mutual and exchange traded funds and it looks like tomorrow’s weekly totals for high yield bonds will tilt slightly to the negative, as there were sizable outflows late last week. The high yield bond new-issue market has been quiet as no deals priced yesterday and there are five deals on the forward calendar for ~$3.5B. There are some big M&A deals coming down the line but we believe that investors need to be careful as some of these deals will be highly leveraged.  Many of these will go into indexes and thus the index-tracking ETFs.  If you go back to some of the large M&A deals done in 2006/07 many of those faced financial stress and/or went into bankruptcy in the years following issuance.

The Bloomberg Barclays US High Yield Corporate Index average spread closed at +335bps over the comparable maturity treasury and nearing that 10.5 year low of +332 hit on Jan. 26.*  You cannot directly invest in an index, so investors need to consider the additional fees and trading costs embedded in ETFs and mutual funds.  Additionally, within the existing high yield market, there are some securities that don’t produce a lot of yield and currently we are seeing that in some of the larger, on-the-run names that are loaded in the various indexes.  Active managers like Peritus have the flexibility to pick and choose the securities in the industries that we believe will do well in this environment, with the goal of adding alpha via coupon yield and total returns as compared to the indexes.

* Bloomberg Barclays U.S. Corporate High Yield Index covers the universe of fixed rate, non-investment grade debt (source Barclays Capital).  Return data for 6/12/18.  Spread is the listed “average spread” over the benchmark for the dates 6/12/18 and 1/26/18.

High Yield Daily Update

The Bloomberg Barclays US Corporate High Yield Index was up 0.12% yesterday*, while high yield bonds along with most other markets are mostly flat today as I think everyone has the Korean flu from being up all night watching the meeting.  One high yield bond new-issue priced yesterday and only three are on the forward calendar for $2.5B in proceeds.  High yield bond issuance YTD is down 30% versus the same period in 2017, while floating rate bank loan issuance is up 18%.  I think this will pick up once the Fed meeting concludes tomorrow with an expected rate hike.  Given the fact that CPI is now outpacing wage growth, many are pondering whether the Fed will temper its three hikes in 2019.

We have seen small inflows come back into high yield bond mutual and exchange traded funds after a big outflow number posted last week.  Given the 10-year Treasury yield has been pretty steady around this 2.95% number and a lack of new-issues, investors are seemingly content to hold and collect a coupon.

* Bloomberg Barclays U.S. Corporate High Yield Index covers the universe of fixed rate, non-investment grade debt (source Barclays Capital).

High Yield Daily Update

The high yield bond market is slightly better today following a mixed close on Friday, with the Bloomberg Barclays US Corporate High Yield Index flat on Friday.*  Despite oil prices dropping nearly $6 over the past two weeks, high yield credits in this space are steady.  Russia again seems to be one of the culprits behind the price drop as they pumped more than their quota, but as usual they say they will come back into compliance at next week’s OPEC meeting.

Only one high yield bond new-issue priced on Friday, bringing the month-to-date total for June to six deals for $2.9B in proceeds.  We don’t expect much until after the Fed meeting on Wednesday, where the odds-makers say it is a lock they raise rates again.  Even with this backdrop, we see the 10-year Treasury yield staying below the 3% level, at 2.95% today.

* Bloomberg Barclays U.S. Corporate High Yield Index covers the universe of fixed rate, non-investment grade debt (source Barclays Capital).

High Yield Daily Update

High yield bonds finished slightly higher yesterday and are following suit again today, as are floating rate loans.  The Bloomberg Barclays US Corporate High Yield Index was up 0.10% on Monday.  Money continued to leak out of the bond component of the high yield debt market, while the inflows to floating rate loans continue.  The percentage of loans trading above par has risen to 60.0% from a year-to-date low 54.7% on May 30th, although this number is below the 80.5% high on set on February 2nd.  One high yield bond new-issue priced yesterday and there is a fairly light forward book.  May’s new-issuance was the slowest May in eight years.

Oil is higher today despite that EIA report yesterday that showed US stockpiles way above estimates.  Maybe some of this is short covering and maybe some is the fact that many feel Venezuela’s problems will smooth out the inventory problem in the coming months.  With the 10-year Treasury rising closer to that 3% mark and European yields rising, it appears the need for yield is greater than the risk.

We are in a period of uncertainty in many areas of fixed-income investing and many advisors I speak to don’t really understand how very different an active manager like Peritus is compared to an index-tracking, passive fund.  Generally the large funds have huge marketing budgets so that is what is frequently seen on TV and believe it or not it often makes advisors comfortable as big means safe to them.  Many also stay away from the high yield bond and loan market because they think it is still the risky and small market that was the driver behind corporate growth and M&A in the 80’s and 90’s.  I would encourage you to go read our white paper on the HY market at www.peritusasset.com, entitled “The New Case for High Yield: A Guide to Understanding and Investing in the High Yield Market,” to learn about how the high yield market has developed over the past three decades and why we believe that an active allocation to high yield should be a core position in investors’ fixed income bucket.

* Bloomberg Barclays U.S. Corporate High Yield Index covers the universe of fixed rate, non-investment grade debt (source Barclays Capital).

High Yield Daily Update

After the Bloomberg Barclays US High Yield Index was up 0.13% on Monday*, the high yield market is higher for the third straight day despite assets leaking from the index-tracking high yield ETFs. The short-dated high yield ETFs had a large outflow yesterday totaling $361M. Only one high yield bond new-issue priced yesterday and only two deals are on the forward calendar.  May was the lightest May since 2010 on the new issue front, with volume hitting $16.5B versus an average May volume of $40.7B.  The last five years May averaged $27B in high yield bond new issue proceeds.

Only one high yield bond default took place in the month of May and we expect this low default environment should continue as the US economic strength continues.  Speaking of the US economy, the May ISM Non-Manufacturing came in above estimates, with the backlog of orders the highest on record and new-orders were also above estimates.

We believe that the high yield market continues to offer attractive yield and absolute return opportunities for active managers such as Peritus, while we believe that the index-tracking managers will continue to fight the low rate environment with many higher rated (BB rated) issuers bringing bonds with low coupons, which seems to be reflected in the distribution yields.

* Bloomberg Barclays U.S. Corporate High Yield Index covers the universe of fixed rate, non-investment grade debt (source Barclays Capital).

High Yield Daily Update

High yield bonds are better again today following Friday’s positive day, with the Bloomberg Barclays US Corporate High Yield Index up 0.09% on Friday.  European markets are steadier and Italy is getting their house in order, which is calming the US markets.  Oil is slightly higher and the US rig count was up two to 861 rigs, the ninth straight week of increase and the highest count since March of 2015.  Coal names are higher as the President urged power plants to use more clean coal.

Outflows from high yield bond mutual and exchange traded funds continued on Friday, with loan funds seeing a small inflow. Through the first five months, high yield bond mutual and exchange traded funds have seen a -$19.9B outflow, while floating rate bank loan mutual and exchange traded funds have seen a +$9.7B inflow.  One high yield bond new-issue priced on Friday and only two are on this week’s calendar thus far.  May’s high yield bond new-issuance came in at the slowest May since 2010.

Keep an eye on the upcoming G7 meeting and the talk from all sides leading into this.  We expect that there will be increased volatility as all nations continue to voice their positions in the media, but we all know that changes when you sit face to face with someone.

* Bloomberg Barclays U.S. Corporate High Yield Index covers the universe of fixed rate, non-investment grade debt (source Barclays Capital).

High Yield Daily Update

The Bloomberg Barclays US High Yield Index was up 0.08% yesterday, but down -0.55% for the month of May.*  Today, the larger, on-the-run high yield bonds are a touch weaker, while there is a decent bid to alpha names as outflows continued yesterday from index-tracking ETF’s.  Lipper reported a net outflow from high yield bond mutual an exchange traded funds for the week ending May 30th of -$18M, with active mutual funds seeing the brunt at an outflow of -$774M.  Floating rate bank loan mutual and exchange traded funds saw another net inflow of $275M, but -$169m left ETF’s.

The non-farm payroll numbers came in above estimates but the participation rate was lower.  Wages held steady and should alarm the Fed about wage inflation.  The private sector was the big catalyst behind these numbers and that is what we want to see.  Only one high yield bond new-issue printed yesterday and no issuance is expected today.

* Bloomberg Barclays U.S. Corporate High Yield Index covers the universe of fixed rate, non-investment grade debt (source Barclays Capital).