High Yield Daily Update

The Bloomberg Barclays US High Yield Index was up 0.05% on Friday,* but high yield bonds are opening weaker to start this new quarter with the larger on the run names bearing most of the downside.

There should be lots of fireworks this week literally and figuratively as tariffs go into effecting at different times through the week and Independence Day is on hump day, where we’ll get bar-b-ques and booms in the sky.  The Asian markets were lower today going into these continued trade tensions and it appears to be risk off everywhere else, as equities are down and there is a small bid in longer Treasuries as those yields continue to drift lower.  The US dollar continues to strengthen while Merkel’s/Germany’s issues continue to weaken the Eurozone markets and euro currency.

Last week was one of the busiest since March for high yield bond new-issues with over $7B pricing all the while the equity markets were down and the VIX was up significantly.  Volume in new-issues are still trailing last year by ~23%.  With the high yield index spreads widening out over the last week, we believe this could create an opportunity to add some good quality paper at a discount for active managers.

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 High Yield Index was down -0.11% yesterday,1 and today the sentiment is definitely risk off as high yield bonds are down.  Some of this is fueled by continued outflows from the asset class.   To understand the magnitude of flows, there have been swings in flows of a few billion dollars from week to week but when you have a total market size of $1.7 trillion for bonds and another $1.1 trillion in floating rate loans,2 weekly flows are not overly important as it pertains to the market.  One high yield bond new-issue came to market yesterday and there are six expected to price today for a total of  about $3B in bonds, leaving several more for tomorrow for about $4B.

Retail bonds have led the way in recent performance in the various high yield index’s, but today they are leading on the way to the downside as Amazon is sending volatility through the pharmacy credits with their purchase of PillPack.  Technology is also weaker as the tariff debate with China continues with policy in the tech sector leading the headlines.

Oil credits remain steady as oil pushed through $73.  Several catalysts are in place for these higher oil prices, including the dynamics between Iran and the US, Libyan volatility, the Syncrude shutdown, and oil is in backwardation, reducing motivation for the oil industry to store oil.  Even though we have record production in the Permian basin, there is not enough infrastructure to get the oil to refineries and ports.  However the US still refined 17.82m b/d, the highest level recorded, with data going back to 1982.

1 Bloomberg Barclays U.S. Corporate High Yield Index covers the universe of fixed rate, non-investment grade debt (source Barclays Capital).
2 Acciavatti, Peter D., Tony Linares, Nelson R. Jantzen, CFA, Rahul Sharma, and Chuanxin Li, “Credit Strategy Weekly Update,” J.P. Morgan, North American High Yield and Leveraged Loan Research, June 22, 2018, https://markets.jpmorgan.com, p. 51, 61.

High Yield Daily Update

The Bloomberg Barclays High Yield Index was down -0.6% yesterday,* following a mixed Monday where we saw the large index flow names weaker, while other names were holding their ground despite dollars leaking out of the asset class.  The BB rated sector of the high yield indexes have been the weakest of late primarily due to their smaller coupons in this uncertain interest rate cycle.

Even though the 10-year Treasury yield continues to drift lower, here at 2.85% today, money continues to flow into floating rate bank loans.  I don’t believe it is because the smart money is betting on a flat or steeping yield curve as the Fed raises rates, but because the advertising spend by the big ETFs and mutual funds is touting floating rate debt.  It seems that almost every time I see a financial commercial, it is for floating rate or interest rate hedged products, and so the lemmings go.  Also, month-to-date, 47 US CLOs (collateralized loan obligations) have priced totaling $23.7B, which is keeping a bid under the loan paper as Treasury yields fall.  If you do some work of what kind of demand is out there for yield, you will see that the US longer maturity debt is in high demand and the aging population needing income is growing in record numbers.

The high yield bond new-issue market woke up yesterday with three deals coming to market, with two of them in the energy sector, as oil prices moved above $70.  There are still 10 issuers lined up on the forward calendar for ~$8B in new paper.

The retail sector has been leading the performance train for bonds in the various index’s while energy bonds haven’t moved much despite oil’s rise.  Oil is up big again today as the EIA confirmed a big drawdown and, with the US pulling out of the Iran deal, the US does not sanction Iran but puts pressure on buyers of Iranian oil as per whether they want to do any business with the US.

* 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

The Bloomberg Barclays High Yield Index was down -0.12% yesterday,* as we saw many of the large index-inclusive flow names lower on the day.  High yield bonds are opening lower today across the board.  With index yields rising as prices decline and the 10-year Treasury yield easing to 2.87%, we see spreads widening fairly significantly.

Consumer Confidence came in less than expected, which is not surprising as the Administration can’t get their messaging straight on tariffs, China and the effect on the US economy.  There has been constant confusion in the messages conveyed by the President, Mnuchin and Navarro.  The good thing about high yield issuers is that many are mainly domestically-concentrated companies, which would make them less exposed to this issue than the larger multi-nationals.  Chinese stocks are now considered in bear market territory.  Given their economy is trade driven, while the US economy is about 70% consumer/service driven, we are in a better place to withstand the volatility of these negotiations.

No high yield bond new-issues came to market yesterday and so far this month, the primary market is well behind historical volumes.  With next week a write-off because of Independence Day falling on a Wednesday, we’ll see how the market absorbs ten issuers for about $7.5B in proceeds on this week’s calendar.

High yield bonds saw ~$500M in outflows yesterday while floating rate loans continue to attract inflows.  That is interesting since several institutions have recently said the 3.12% yield level we saw on the 10-year Treasury would be its peak in 2018.  It often seems that the retail investor is late to the party and we believe that the passive-index tracking funds are too given their lack of ability to adjust their portfolio due to market changes.

Peritus I Asset Management is 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 rheller@peritusasset.com, 805-879-5620.

* 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

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 rheller@peritusasset.com, 805-879-5620.

* 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 0.08% yesterday1, high yield bonds are opening weaker today along with equities and oil.  The banter around the OPEC meeting is for an increase in production of 600k bpd.  Even though the US has increased production, the US is struggling here because of the lack of pipelines and transportation to the export terminals.

One high yield bond new-issue priced yesterday and there remains 10 deals for ~$7.5B on the forward calendar.  JP Morgan estimates that the high yield bond new issue supply will only total $265B this year, down from the prior estimate of $315B.  Outflows came back to the high yield bond market yesterday, while inflows continue to come into floating rate loans.

Even though there has been a tremendous amount of inflows into the floating rate loan market so far this year, the percentage of loans trading above par ($100) has declined by 30% since the beginning of May to 45.2%. The percent above par reached a year-to-date high of 80.5% on February 2nd.2

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, 6/21/18, https://markets.jpmorgan.com.

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.