The Truth About Yield

There has been a good amount of coverage over the past couple weeks of the fact that the high yield indexes have reached record low levels on a pure yield basis.  So, this naturally leads to the question, is there anything left to be had in high yield?

Our answer is undoubtedly yes.  First it should be noted that we are nowhere near record lows from a spread perspective1:

The reality is that spreads are just slightly below the 20-year median level, which to us still seems pretty reasonable given the very benign default outlook for high yield bonds2 and wide open new issue market, as well as the record levels of cash sitting on corporate balance sheets.  Record low yields are a function of the record low interest rates that we have seen for several years now.

The second reality is that just because the index yields are now around 5.5%, it doesn’t mean that is all that is available in the market.  Yes, there is a huge portion of the market trading at massive premiums to par, and even big premiums to the bond’s call price, producing very paltry yields for investors.  This is what is known as negative convexity, and is especially true of many of the large, on-the-run names that are widely held by the massive funds in the high yield market.

These funds need product, and are just grabbing what they can, irrespective of value and yield.  However, there is also a sizable portion of the market that is trading at high single and low double digit yields.  These aren’t all companies that have unsustainable balance sheets, tight liquidity, or about to default; rather, these are for the most part decent businesses that just don’t hit the radar screens of the large players because the tranche sizes may not meet the minimum thresholds set by some funds or they may just not be widely covered by the Wall Street analysts (and keep in mind analyst coverage doesn’t necessitate liquidity).

So for everyone who tells us that there is no yield available…work harder.  Just like anything in life, the most reward is gained by working hard and not cutting corners.  As active managers, that is just what we do at Peritus.  We don’t just embrace the popular Wall Street recommendation, jumping into the same overvalued trade as everyone else, but instead scour the investment universe to find attractive value.  The high yield market still offers plenty of yield for those managers willing to do the hard work to find it.

1 Acciavatti,, Peter D., Tony Linares, Nelson Jantzen, CFA, and Rahul Sharma, “Credit Strategy Weekly Update,” J.P. Morgan North America High Yield and Leveraged Loan Research, April 19, 2013, p. 33.
2 Acciavatti,, Peter D., Tony Linares, Nelson Jantzen, CFA, and Rahul Sharma, “Credit Strategy Weekly Update,” J.P. Morgan North America High Yield and Leveraged Loan Research, April 19, 2013, p. 8.
Posted in Peritus

High Yield Morning Update

Earnings this week continue to point to a sluggish economy, with cost cutting initiatives helping numbers hang on, but an outlook that is questionable at best. Apple announces earnings after the close today, in case anyone has been living under a rock and hasn’t heard. Flows in high yield have remained mild this week, and the overall tone for high-yield bonds remains very positive, with buyers scouring for cheap offers. This morning, markets are enthusiastic about the Fed’s and ECB’s focus on supporting economic growth, causing a rally in all risk markets, while the 10-year note holds below 1.70%.

Posted in HY Update

High Yield Morning Update

Earnings releases over the last couple weeks have continued to reveal weakness in the economy and provide caution looking forward, causing volatility for equities, while pushing rates lower and insuring that the Fed will continue to support the economy.  All the while, high-yield bonds have rallied to new all-time low yield levels. This week will be another busy one for earnings, which along with economic releases, will set the tone for the market throughout the week. Two deals in $1.5bn of total paper priced on Friday as Charter Communications and WIND Telecommunications brought a couple of drive-by issues, capping off a week that saw seven deals price for total proceeds of $5.675 million. The forward calendar is currently empty, but is expected to reload quickly here to start the week. This morning equities are opening mixed, the 10-year note is trading sub 1.7% again, HY20 Credit Index is up ¼  of a point, and high-yield cash bonds are mixed with a continued strong underlying bid to the market.

The HY 20 Index (Markit CDX North America High Yield Index) is composed of 100 non-investment grade entities, with all entities domiciled in North America.  This index rolls every six months, in March and September.
Posted in HY Update

High Yield Weekly Update

As economic conditions soften, bringing volatility to the equity markets, high-yield bonds continue to hold up well, helped by strength in the Treasury markets keeping rates at year-to-date lows. Against a backdrop of negative equity returns this week, the high-yield market was able to set another all-time low from a yield perspective on the Bank of America High-Yield Index (BAML) of 5.49% at week’s end. For performance the BAML HY Index returned -0.10% for the week, bringing the year-to-date total to 3.61%.

Index

19-Apr Level

Week Returns

YTD Returns

BAML HY

5.49%

-0.10%

3.61%

BAML Spread

477bps

-3bps

-46bps

Dow

14,547.51

-2.14%

11.81%

S&P

1,555.25

-2.05%

9.72%

Nasdaq

3,206.056

-2.70%

6.51%

10yr

1.70%

0.14%

-0.87%

High-yield primary market activity continues to be subdued compared to 1st quarter volume, pricing seven deals throughout the week for total proceeds of $5.675 billion. With yields continuing to push in to record low territory, the pace of flows into the high-yield market has slowed, but remained positive this week with mutual funds and ETF’s reporting new assets totaling $242 million for the week.

The Bank of America Merrill Lynch High Yield Index monitors the performance of below investment grade U.S. dollar-denominated corporate bonds publicly issued in the U.S. domestic market.  Index data sourced from Bloomberg.

Posted in HY Update

High Yield Morning Update

High-yield funds reported inflows totaling $242 million over what was a choppy week for the asset class. Despite some volatility in the market this week, the yield has continued to compress on the Bank of America High Yield Index, closing at a new all-time low at yesterday’s close of 5.51%. Three new deals priced yesterday for proceeds of $3.6 billion for the busiest new issue day of the week. This morning equities are flat, high-yield is opening with a strong bid, and volume everywhere is low as much of the focus is on everything going on in Boston.

The Bank of America Merrill Lynch High Yield Index monitors the performance of below investment grade U.S. dollar-denominated corporate bonds publicly issued in the U.S. domestic market.  Index data sourced from Bloomberg.
Posted in HY Update

Peritus in the News

Peritus was discussed on Bloomberg Radio in a segment entitled, “Balchunas on a ‘Dogfight in the Junkyard’” on April 18, 2013.

Posted in news

Peritus in the News

Peritus was mentioned in the article, “CNBC’s Model ETF Retirement Portfolio for the 30-Year-Old Investor,” by Tom Lydon, April 17, 2013.

Posted in news

Upcoming Event

Ron Heller, Chief Investment Officer of Peritus, will be attending the IMCA Annual Conference in Seattle, April 28th through May 1st.  He will be available to discuss Peritus’ strategy and portfolio at booth #333.

Posted in news

High Yield Morning Update

The high-yield market was strong throughout the day yesterday, as all markets recovered from Monday’s losses, but is opening with a weaker tone this morning, as stocks and commodities trade lower and the 10-year Treasury note trades below 1.7% again. In the market this morning, there is selling pressure in select credits where there is some fundamental concern, but names that have been hard to find, remain tucked away despite some weakness. Fund flows, positive week to date, have reversed this morning and we’re seeing some forced selling out of the ETF’s on redemptions with the heavy market. The high-yield primary market took the day off yesterday, not pricing a single deal, but it looks like at least two deals will price this afternoon. This morning all markets are opening under pressure on earnings and growth concerns.

Posted in HY Update

High Yield Morning Update

The high-yield market was weaker by ¼ – ½ point Monday, in sympathy with weak equity markets, though volume was light and there was no real sell pressure at lower levels. Any weakness yesterday is being met with strong buy pressure this morning however, and the market is once again moving higher, as has been the case after any weakness this year. Just a single deal priced yesterday in the primary market as the calendar has quieted down significantly from last week. Pinnacle Foods came with a downsized eight-year deal. The notes were originally marketed at $400mm but were downsized to $350mm amidst the down market day. The bonds priced at 4.875% in the middle of its 4.75-5% price talk, but are trading 101-101.5 this morning in early trading. This transaction is a good case study of the refinancing activity we’ve seen in the high yield market recently, as this deal was brought (along with IPO proceeds) to replace existing 9.25% debt, saving the company over 400bps in interest expense. The forward calendar currently stands at four deals for about $2 billion in proceeds, but we’ll likely see some drive-by deals announced over the next couple days as high-yield strength persists. This morning equities, commodities and high-yield markets are all rebounding after yesterday’s sell-off.

Posted in HY Update