High Yield Daily Update

It is risk off again today with both equities and high yield corporates lower.  There however is not a big flight to quality, as the 10-year Treasury yield and the rest of the yield curve are pretty flat on the day.  We are seeing outflows from the asset class and Lipper will report the extent of these outflows after the close today.  With outflows we are seeing weakness in retail, broadcasting and telecom sectors leading the way lower.

Despite the outflows and a generally weaker high yield market, new-issues continue to print as the demand for yield will not subside despite some short term volatility.  There were two deals that printed yesterday that traded higher in the secondary.  There are still a dozen deals on the forward calendar.  Given outflows and a temporary risk off mentality these issuers might have to pay a fraction higher to attract fresh money.  Several retailers are reporting today, including Kohl’s, Macy’s and Nordstrom which may add volatility to this sector.

High Yield Daily Update

The high yield debt markets are a bit softer again today on small outflows and on ancillary issues, rather than based on company fundamentals.  The biggest issue being the confusion with the new Tax plan as many are fearing there might be a cap on interest deductibility.  We are currently seeing a bond pickers market and believe you must be selective.  Look no further than the Sprint bonds tumbling on the rumored breakup with T-Mobile.

Despite oil jumping to a 28 month high, the 10-year Treasury yield falling to 2.31% and equity markets hitting new highs, the high yield market has flat lined—which we would view as healthy.  Also, Moody’s Liquidity Stress Index dropped to a record low of 2.7% in October, which we believe also signals a healthy high yield corporate environment.  Two new-issues priced yesterday with a half dozen on the calendar.  This should pick up as earnings blackout periods end.

I spoke at the ETF.com “Inside Fixed Income” conference, and the elephant in the room was where rates are going. As we have said for a few years now we feel the 10-year will stay closer to 2% than 3% based on many different factors we see.  You can read our recent commentary explaining this, “Lower for Longer.”  It is becoming harder to ignore the yield curve flattening, the 2s/10s curve is flattest it’s been in about a decade, so do your own work, don’t buy the media pundits.

High Yield Daily Update

The high yield bond market has turned negative today as it is expected the Fed will hint at a rate hike next month in their release this morning.  Even with a hike built in, the longer side of the yield curve is seeing lower yields.  Economic data has been strong, but all eyes are on the wage number due out on Friday. Two other big announcements tomorrow will help decide which way the high yield market trades: the tax plan and the Fed Chair announcement.

Only one new-issue priced yesterday, while six are on the forward calendar.  We expect that it will remain a bit slow until some earnings blackout periods end and we move beyond some of this week’s important announcements referenced above.

Regardless of what happens, many investors need some tangible yield into their portfolios, and we believe high yield corporate bonds can provide this yield. The Moody’s Liquidity Stress Index dropped to 2.8% mid-October, revisiting record lows of April 2013, which indicates to us the fundamentals in this market are healthy, but many prices and yields are not so healthy. With one of the big index-based high yield ETF’s printing a 4.96% 30-Day SEC yield for October1, we believe there is better yield to be had in an actively managed high yield strategy.  For more, visit www.advisorshares.com/fund/hyld.

1  The 30-day SEC yield is an annualized yield that is calculated by dividing the investment income earned less expenses over the most recent 30-day period by the current maximum offering price.  Data as of 10/31/17.  Yields and other statistics are no guarantee of actual performance.

High Yield Morning Update

The high yield bond and loan markets are slightly better today in anticipation of a busy week.  The markets finished flat last week even though the longer dated Treasury yields rose.  High yield issuance surpassed $29B in October, the largest October since the financial crisis, and we believe this strong issuance is good for active managers like Peritus as there is plenty of inventory to choose from.  News items out this week that may impact the high yield market include US Treasury yields being down modestly (10yr at 2.39% or 9bp below last week’s high), a possible Fed chair announcement, a House tax bill, inflation data released (US ECI and PCE, EU CPI), central bank decisions (BoJ, FOMC, BoE), and US non-farm payrolls on Friday.

While rates have moved up over the past few months, the percentage of the JP Morgan Loan Index trading above par stands at 74.7%1, exceeding the high reached in early August.  We believe it is not time to be reaching aggressively for yield, but we also don’t see many of the low yielding indexes and index-based products as reflective of some of the yield the high yield market has to offer; rather we believe that focus should be on a more concentrated portfolio with attractive credits that can provide above average tangible yield and YTW.

1  Jantzen, Nelson, CFA and Peter Acciavatti, “JPM High-Yield and Leverage Loan Morning Intelligence,” J.P. Morgan North American Credit Research, 10/30/17, https://markets.jpmorgan.com.

High Yield Daily Update

High yield is better today as Treasury yields ease, while stocks, oil and gold all hover around unchanged on the day.  There is some caution as witnessed by an outflow -$450M from high yield mutual and exchange traded funds for the week ending October 19th, while the BB credit spread on the Bloomberg Barclays High Yield Index is at a 10 year low.  Where is the geopolitical risk or an unforeseen jump in inflation?

If you look at the Moody’s Liquidity Stress Index, it dropped to 2.8% in mid-October reaching lows not seen since April of 2013. This points to corporate liquidity strengthening and we see no imminent fear of accelerating defaults.  Another indicator on the health of the high yield market is companies rated B3 or lower have declined, indicating that the overall health of the junk bond market is improving and it is composed of better quality credits. Only three new-issues priced for a paltry $460M, with much of the slowness driven by it being earning season as many companies have a blackout period in effect.  There are six deals on the forward calendar.

High Yield Daily Update

Economic releases have been strong as have been bank earnings, while consumer product company earnings have been weak.  Energy, TMT (telecom, media, tech) and auto companies were better while anything building, REIT and gaming related lagged yesterday.

Outflows returned to the high yield bond market to the tune of -$450M flowing out of high yield mutual and exchange traded funds.  This breaks up the +$3.5B that flowed into high yield funds the last six weeks.  The new-issue market was pretty light this week with less than a handful pricing but the calendar is filling for next week.

High Yield Daily Update

It is risk on again today as high yield bonds are better along with equities soaring, as the DOW blows past 23,000.  Sellers of longer maturity Treasuries are driving the yields higher as the 10-year sits at 2.33%.  It looks more and more like the Fed will raise rates again in December as the Bloomberg’s World Interest Rate Probability calculator sits at 84%, up from 69% just two weeks ago.

The high yield new-issue market only produced one small deal yesterday but three more were added to the calendar bringing it to nine.  With the Fed expected to raise rates in December, where will new-issuers price their coupons as the yield curve flattens?

Given the demand for yield continues and certain parts of the high yield bond and loan markets are tight from a historical perspective, where does one still get decent tangible yield for their clients that want to live off of cash flows rather than other means?  See our piece, “Finding Value” to read about the value we see that is still available in today’s high yield market.

High Yield Daily Update

As we start a new week, the 2-year US Treasury yield has hit 1.54% and if it closes above this level that will be the highest close since September of 2008.  On the long side, the 10-year Treasury yield has slipped back to 2.30% and many are expecting a future inverted yield curve.  Against this backdrop, we have seen some attractive discounts in the floating rate loan market and are taking advantage of these.  Within the high yield bond market, only one new-issue priced yesterday but there are eight on the forward calendar as issuance took a breather as the earnings season kicked off this week, forcing issuers to wait for the blackout period to end.

Oil is moving slightly higher again as the Iraq versus Kurdistan tensions are escalating, spooking the market a bit as they feel the Kirkuk field could be in jeopardy.  Import/export prices came in better than expected and US manufacturing is shrugging off the hurricanes and churning higher again.  Lastly, what does it say about the future of retail bricks and mortar when Nordstrom pulled the plug on going private, as there was not enough interest from private equity and banks willing to back this.

High Yield Daily Update

Pray for those injured or killed in last night’s shooting, including two of my friends who were injured but will be ok.

Today, high yield bonds are opening lower following the lead of oil and gold.  Treasury yields are flat, while equities are up slightly.  While the demand for yield remains, as more inflows came into the asset class last week, the supply of corporate bonds is seen as light going into October as compared to last October.  There are nine new issues on the forward calendar after two priced on Friday for $2B in proceeds. Fourteen deals for $7.1B priced last week.

The VIX dropped another 6% last week and is down in 8 of last 10 sessions, while oil plowed through $52.  This can reverse quickly, as seen by oil today down $1.50.  Complacency is not what you need here.  In order to fill out your fixed income portfolio wisely, we believe that you need to be with an active manager that can work to provide alpha while working to manage the risks of the markets for you.  Given the index tracking products having a large share of their portfolios in BB rated securities and that segment of the market is at multi-year low spreads, we believe that these products don’t represent the value the high yield market has to offer and see risk if/when there will be a reversion to the mean.

High Yield Daily Update

High yield bonds were firmer yesterday as demand continues to outpace supply by approximately three times.  Four new-issues priced yesterday for $1.5B in proceeds, with another half dozen on the forward calendar.

Long maturity Treasury yields continue their steady climb with the 10-year pushing through its 200-DMA and the 2-year touched its highest level since November of 2008.  With this action happening in Treasuries, we are seeing some inflows into floating rate loans.

Consumer Comfort numbers increased for the first time in four weeks, while Q2 GDP was finalized at a 3.1% clip.  Expectations are for a dip in Q3 GDP on the back of the hurricanes and uncertainty in Washington, DC.

The risk spread over US Treasuries for BB rated US corporate bonds tightened to 211bp on Wednesday, the lowest level since the 2008 Financial Crisis, according to Bank of America Merrill Lynch data.  We believe this is why you can’t sit in a static beta index product.  Yes it’s lower cost, but we believe this is an environment in which you will get what you pay for.  We believe proven, active managers, such as Peritus, can benefit during this environment.