High Yield Daily Update

High yield bonds were weaker to close out last week along with equities, as the Fed bumping up rates, the terrible budget deal and the proposed steel and aluminum tariffs weighed on markets.  The fear of rising rates has subsided as the 10-year Treasury yield has eased to 2.83% after hitting 2.96% last week. Only one new-issue priced on Friday for $400M, increased in size from the initial proposed $300M.  As I mentioned last week, seven new-issues are on the forward calendar as the earnings blackout season is over and lower rates may allow many companies to lock in attractive rates.  Again, we are believers in higher growth with some of the recent legislative actions, but we also see a huge demographic pull which will offset this somewhat, so we don’t see soaring longer rates (for more on the demographic overhang, see our writings at www.peritusasset.com, including “Pricing Risk and Playing Defense“).

Oil traded up near a four year high overnight before pulling back; this is on the heels of the appointment of the HAWKISH John Bolton to the government payroll.  He does not like the Iran deal and many feel when this deal gets torn up, this will take much of the Iran oil production off the market.

Despite the high yield mutual and exchange traded funds having outflows in nine of the past ten weeks totaling -$17.7 billion, the market has remained pretty stable and uneventful.  As the demographic landscape continues to play out, rates around the world are below historical norms and we expect that you will continue to see demand for high yield bonds and loans. Peritus manages both asset classes.

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 are weaker today along with equities, despite the 10-year Treasury yield easing to 2.81%, down from 2.95% seen just last week.  It is amazing how fast these moves happen, as early in my career it used to take months to move Treasuries this far.  The new-issue market has been quiet this week with only two issuers having brought a small issue each.  There are only four on the forward calendar as the Fed meeting and volatility in equities and Treasuries have kept issuers on the sideline.  I would expect a bunch to line up for next week with the 10-year Treasury yield falling, making it now cheaper for issuers of debt.

Oil is back below $65 and crude oil storage is below the five year average for the first time since 2014.  OPEC’s production cut goal was to get storage below this five year average and they have achieved this.  As per the US’s domestic production, crude oil imports were down and exports were up.  US production was up 26,000 bpd compared to last week to an all-time record in the latest EIA reporting.

High yield has held in very well despite continuing outflows from the asset class.  It is expected that another ~$1B has left high yield bond mutual and exchange traded funds in the latest reporting week, we will find out the actual number after the close today.  High yield bonds have seen outflows in seven of the last eight weeks and with this week’s outflow, it will make it eight out of nine.

High Yield Daily Update

Will the markets be as crazy as the NCAA basketball tournament this weekend? Now you know why they say March Madness!

The market finished last week slightly higher on light volume and Lipper reported a modest inflow of $10m last week into high yield bond mutual and exchange traded funds, the first inflow after eight consecutive weeks of outflows.  Even with little in the way of inflows, the new-issue market was busy last week, the 4th busiest week of issuance YTD with 13 deals for $7.095B in proceeds. Over the week, the high yield market brought seven CCC rated deals for $4B in proceeds (55% of issuance), which would put it at the biggest weekly volume for the riskiest credits in more than two years. We believe this is why you need active management, as fundamentals do matter.  We have seen many of the CCC deals as good credits for investors’ portfolios.  When we look at a credit, we don’t make investment decisions based on the ratings as our experience has been that the ratings agencies often tie ratings to size and the companies’ time in the market as an issuer.

Additionally, we believe that active high yield ETF’s are a good vehicle for investors because they get the benefit of accessing the entire market.  For instance, this is important because if you look at the new-issue market, 144A for life deals continued to dominate high yield issuance, accounting for 85% of issuance last week.  An investor must be a Qualified Institutional Buyer to be able to hold these 144A securities in their account, thus individual retail investors that do not meet these requirements would only have access to 15% of the bonds issued last week (and this is typical of what we see most weeks).

High Yield Morning Update

High yield bonds finished flat yesterday, as index-tracking ETF’s has small outflows, while active funds had inflows.  Three new-issues came to market yesterday for $2B in proceeds and there are seven deals on forward calendar with only one pricing today.  It could be one of the busiest Marches after today’s CPI release was in line and the 10-year Treasury yield eased to 2.85%.  Companies may well look to take advantage of the fact that these rates have stopped climbing.  Moody’s predicts the global speculative grade default rate will fall to 1.7% by the end of 2018 from 2.9% in 2017.  We believe a strong global economy and declining default rates bode well for the high yield market going forward.

Equities are mixed as oil slides and gold and silver continue to climb. One concern in the US economy as we see rising mortgage rates is summed up best by the Chief Economist from the MBA (Mortgage Bankers Association) where he states that US home prices are moving higher twice as fast as personal income.  Fewer are able to build equity in their home, something that has been a staple for generations, which may ultimately put more pressure on pensions and social security income.

High Yield Daily Update

High yield bonds are opening this new week a bit better in the secondary market even though some of the HY ETF’s are off a bit.  Three new-issues priced on Friday, all eight year notes with two rated BB- and the third B+.  Note the coupons on these look to be a tad higher than a few months ago.  There are 13 new-issue deals on the forward calendar with three slated for today.  High yield saw inflows on Friday to mutual and exchange traded funds the tune of +$519M and Lipper reported an outflow of roughly -$525M for the week ended March 7th, it’s the eighth consecutive week of exits, for a total outflow of -$16.6B over that period.1

Oil, Gold and Equities are all lower today while the 10-year Treasury yield is easing a bit to 2.88%.  We will keep an eye on this as the CPI and PPI are out tomorrow.  Some are forecasting the Fed will raise rates 3 – 4 times this year and thus moving the 10-year Treasury will settle just above 3%.  What strategies should investors utilize should that play out?  Click here to read our piece, “Strategies for Investing in a Rising Rate Environment,” where we look at just how the high yield market has historically performed in the face of rising rates over the past several decades.  We believe that high yield is up there in places to have an allocation during periods of rising rates, with its higher coupons and shorter average maturities than many other fixed income asset classes as two of the most compelling reasons.

1  Jantzen, Nelson, CFA and Peter Acciavatti, “JPM High-Yield and Leverage Loan Morning Intelligence,” J.P. Morgan North American Credit Research, 3/9/18, 3/13/18, https://markets.jpmorgan.com

High Yield Daily Update

Its risk on across the board today after the strong non-farm payroll numbers, with construction leading the way.  Despite this report, some wonder if construction will continue to lead if interest rates keep creeping higher, pulling mortgage rates up with them. However, we are not a believer rates will be rising much.

Lipper reported an outflow for the week ending 3-7-18 of -$525M from high yield mutual and exchange traded funds, and then followed by another $292M outflow yesterday.  This was the 8th week in a row of outflows, but was the lightest outflow for active mutual funds in two months.  Lipper reported that high yield loan funds saw an inflow of +$588M on the week, making for inflows in six out of the last seven weeks.  With our active strategy, we are one of the few active fund managers to include both high yield bonds and floating rate loans, giving investors access to credits from the $1.7T global US$ high yield bond market and $1T loan market1.  Three new-issuers came to market yesterday and there are a dozen on the forward calendar.

1  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, March 2, 2018, p. 42, 52, https://markets.jpmorgan.com. High yield market size based on the global US$ denominated high yield bond market.  Loan market size based on JP Morgan Leverage Loan Index.

High Yield Daily Update

High yield bonds are a bit lower today along with equities as there is some risk off investing going on.  The strong ADP payroll number is not helping the markets and oil is a bit of a drag, moving lower toward $60.  There were outflows from the high yield bond asset class yesterday after a one day inflow on Monday.

Today’s volatility is being fueled by Gary Cohn’s departure as the chief economic advisor, but the departure makes sense.  He was aligned with President Trump on the Tax bill and they got that through, they are not aligned on the trade/tariff policy so they agreed to move on.  Just take a look at today’s trade imbalance -$56.6 billion number, this can’t continue.  I think the elephant in the room here is how real are China’s economic numbers and will this more equal playground the President is proposing expose how their government is responsible for propping up much of their economy, not the consumer.

With that said corporate America is doing well as witnessed by this latest earnings releases.  What do you do with all this volatility and uncertainty as per Washington DC politics and policies?  We believe that Peritus’ active high yield strategy offers investors an attractive option in today’s market environment.  We invest in both high yield bonds and floating rate loans, and look to generate a coupon income and a yield to maturity that is higher than that of the indexes.

Peritus’ founders have a 23 year history together, refining and adapting to market changes and cycles, and we we feel we have a process and strategy in place with a goal of trying to deliver consistent returns with lower volatility than many of the index-based vehicles.  The beauty of fixed income is the tangible dividends that are paid out or reinvested each and every month, and the market can’t take those away from you.  Plus, you have a set timing on when you can expect your principal back on each holding so if Peritus’ team does their job this happens and that principal may appreciate.

High Yield Daily Update

High yield bonds are better across the board today after finishing slightly better yesterday on the heels of inflows into the asset class.  There is a bit of risk off today as high yield ETFs and mutual funds are down slightly, while the underlying bonds are better bid.

Four new-issues came to market yesterday for $2 billion in proceeds and there are 14 new-issues on the forward calendar.  We believe that high yield will continue to see activity because it is one of the historically better performing asset classes in a rising rate environment due to its shorter duration and higher coupons offered than many other asset classes.

Moody’s Liquidity-Stress Indicator is at 2.7%, near its historic lows of 2.5%, and Moody’s forecasts the US speculative grade default rate to fall to 2% in January 2019, down from 3.2% today.  As we are nearing an end to earnings season with our own holdings, we are seeing much of the same as Moody’s is.

Equities are lower but still volatile on the heels of President Trump’s tariff talk but the markets are beginning to see that was an open negotiating point. He has his own way of “The Art of The Deal” but it does get the markets reacting.  Money is flowing into gold and silver as a bit of a safe haven against this uncertainty.  In contrast of spreads the JP Morgan US High-Yield Index sit at a spread of 402 bps versus the 384 bps spread for the JP Morgan European Currency High Yield Index.1

1  Jantzen, Nelson, CFA and Peter Acciavatti, “JPM High-Yield and Leverage Loan Morning Intelligence,” J.P. Morgan North American Credit Research, 3/6/18, https://markets.jpmorgan.com.  JP Morgan US High Yield index is designed to mirror the investible universe of the US dollar domestic high-yield corporate debt market, including issues of US and Canadian domiciled issuers.  JP Morgan European Currency High Yield Index is designed to mirror the investible universe of the European-currency denominated high-yield corporate debt market, including domestic and international issues.

High Yield Daily Update

High yield debt was weaker on Friday and the month of February also closed out in negative territory.  Even as the yield on the 10-year Treasury eased back to 2.85%, Friday’s concern was over slower US growth because of President Trump’s pending steel and aluminum tariffs.  I don’t really understand the concern as all of these foreign countries have tariffs against our goods yet they are running a trade surplus with the US.  Sometimes you need to take a little pain to achieve the gain.

The big news in high yield last week was the default and expected coming bankruptcy filing for iHeart Communications.  This is a $16B default, making it the 6th largest on record, and as such a large issuer, many of their various debt tranches have been part of the indexes and the various passive, index-tracking products, many of which focus on tranche size versus fundamentals.

We also saw the 7th straight week of outflows from the asset class, with -$703 million leaving high yield mutual and exchange traded funds over the week, even as the economic landscape for corporate America is good.  Though we still believe that you need to be able to choose the correct securities, as witnessed by IHRT’s expected BK.

10 new-issues for $3.475 Billion in proceeds came to market last week and many of those deals were 3X oversubscribed, indicating to us that there is still a huge demand for yield.  Volume of first-lien institutional loans for February totaled $41.8 billion, nearly three times the $15.2 billion in January.

High Yield Daily Update

High yield bonds were better yesterday but are giving up a little of that today as the markets react to the Fed Chair’s testimony.  Rates are higher all along the Treasury curve as the Chair hinted there could be more than the three rate hikes laid out in the December meeting, but also noted that it was dependent on the growth of the economy and wages.  On the new issue front, one new coal deal came to market yesterday with a minimum of twelve more on the forward calendar.

The retail sector has a lot of earnings releases this week so we will keep an eye on how the consumer is spending, or not.  Remember, the world has a record number of people retiring and that is a headwind to growth and consumption around the globe as those people are generally not out spending, rather they are preserving capital and searching for income to replace their salaries.

JP Morgan threw out a stat today, which was that over the past six weeks we have seen net withdrawals for high yield bond mutual funds & ETF’s total $15.3bn or 7.4% of AUM.  That’s a big number but has created muted volatility.