We have all witnessed a major move in Treasury rates over the last couple months, causing concern for many that we may well be in the early stages of a rising interest rate environment. The traditional thought is that as interest rates rise, bond prices fall. But looking at history, the high yield market has defied this widely held notion. Let’s examine the four main reasons why high yield bonds have historically performed well during times of rising interest rates. Click here to read more.
I have been an investor in the energy space for over 25 years. Outside of interest rates, I don’t believe there is anything that dominates the global economy more than oil prices. It is a product that touches every area of our lives. Like it or hate it, that is the reality. In my opinion, there is something dramatically wrong, as crude oil and gasoline prices are near all-time highs, yet the global economy remains stuck in neutral. I believe that we are being fed a bunch of nonsense with the rhetoric that the U.S. will be energy independent and that new technologies have released a torrent of new oil reserves. The price action is telling us something else entirely. Click here to read more.
Exchange Traded Funds (“ETFs”) for high yield bonds have become a bigger factor in today’s market. However, we believe that the passive, index-based funds have no ability to deal with risks in the current credit market. This involves credit risk, as well as call and pricing risks. The larger on the run names have become significantly over-valued as current market prices are way above their call price. We believe that this will lead to future principal losses, not from default but from these bonds being called well below current trading prices. Additionally, the passive funds hold numerous credits that in our mind are likely defaults and/or restructurings waiting to happen. By their passive nature, these funds do not sell or steer clear of these questionable securities or the over-valued bonds in today’s market. Furthermore, the largest high yield index based ETFs exclude a huge portion of the actual high yield market due to their issue size minimums.
Active management is essential in the high yield space; what you don’t buy is just as important as what you do buy. As an active manager, Peritus does not have the constraints these passive funds face and that flexibility gives us a dramatic advantage in today’s market.
Concerns about inflation and rising interest rates abound right now. The traditional thought is that as interest rates rise, bond prices fall. But looking at history, the high yield market has defied this widely held notion; instead, high yield has historically performed well during a rising rate environment. We look at the four main reasons that explain the high yield market’s lack of sensitivity to interest rates.
ETFs are one of the fastest growing investment products due to their ease of accessibility and operational tax efficient structure. The benefits to investing in an ETF include access, broad exposure, liquidity, transparency, tax efficiency, and income. Additionally, there are benefits to active management within the ETF space.
As we have discussed over the last few quarters we believe that equity investors have been involved in the biggest head fake in history. The notion that nothing in the economy has been fixed is now coming to the forefront.
Our belief is that credit is either AAA or D (paying and expected to continue to pay or not paying and in default). So to us this company was in effect AAA, while one of the major rating agencies was telling us that these bonds “are likely in, or very near default.” There continues to remain a massive disconnect among investors about the corporate bond market, the ratings process and risk.
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