Post November’s election, we see regulation as an area of potential impact on the high yield market—or more precisely the potential repeal of regulation.   The potential repeal of Obama Care is the headline that is getting the most attention.  We are already starting to see certain areas of healthcare within high yield, namely hospitals, get severely hit on the uncertainty over what this could look like and the potential impact any change could have on these individual credit issuers.  At some point these securities will have priced in a worst case scenario and may be a tremendous trade.  Given the speed of markets today, this is likely soon.

But the biggest potential regulatory change that may impact the entire high yield market relates to the potential repeal or modification of the Volcker Rule inside the Dodd-Frank Act.  This provision virtually eliminated proprietary trading at investment banks, which has in turn severely curtailed their participation in marketing making activities in the high yield sector.  As we have seen less dealer participation and inventory, we have seen an impact on liquidity and larger pricing swings in high yield bonds.  This has been something markets have adjusted to over the past couple years, but if some regulations were to be eased and market making activity were to increase, that could improve liquidity within the high yield market.

Liquidity within the bond market has been an area of scrutiny by investors and regulators alike in this post Dodd Frank/Volcker environment.  Rolling back or amending any sort of regulation on this front for the banks may serve to improve their profit levels and reduce compliance costs on not only them, but also the droves of other fund managers that have and will have to face additional compliance costs and reporting burdens as they address some the outcropping of rules addressing liquidity.  And if banks were able to once again more fully participate in market making activities, this could have the effect of potentially improving liquidity/lessening volatility within the corporate debt markets.  This is certainly something we will be paying close attention to.  While changes on this front could be a positive, even if none of this ultimately gets changed, Peritus has been proactively addressing some of investors’ liquidity concerns with recent strategy enhancements (see our piece “Liquidity Management” and read monthly manager commentaries at www.advisorshares.com/fund/hyld) and we believe these enhancements position us well within the current environment.  For more on our thoughts on the economy, rates, regulations, and the outlook for the high yield market as a result of the recent election, see our piece “The Election Impact on High Yield: Rates and Regulation.”

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.