We have just completed our most recent writing, “Certainty, Rates, and the Year Ahead.” Even after a strong showing for high yield bonds in 2012, we continue to believe that this asset class remains in the sweet spot for investors in 2013.1
- High yield bonds have a short duration and limited interest rate sensitivity, given the shorter maturities and higher coupons. We would expect to see higher rates in 2013, which will punish investors in high grade bonds that are more sensitive to rate changes.
- The primary risk for high yield investors is credit risk, which looks to be very tame and manageable over the coming years, as evidenced by the historically low default rates projected by J.P. Morgan and the conservative leverage metrics that we are seeing.
- While all the talk is about the leveraged loan market, we are not convinced. The default outlook for this market is even higher than that for high yield bonds, which would indicate the concept of “lower risk” is an illusion. Additionally, while higher rates would favor the lower duration/floating rate of leveraged loans, the higher interest cost would hurt the credit metrics of loan-heavy capital structures. We encourage investors to use the loan market to expand the number of opportunities to invest in, not to produce what could be illusionary portfolio math.
- While generally low rates and a risk-on mentality appear to favor equities, poor global growth patterns will likely put a cap on returns and will hamper earnings growth and multiple expansion.
We hope you take the time to read our full writing and we look forward to the year ahead.
1 See the paper for source references.