Displaying items by tag: high yield

(New York)

It is pretty easy to sum up what seems like it will be a forthcoming bull market in high yield bonds: “2021 will be the year of the upgrade”. That quote comes from Matt Brill, head of North America investment-grade at Invesco. Ratings agencies are reportedly on the cusp of upgrading between $100 bn and $300 bn of junk bonds to investment grade this year and next. Fund managers are trying to buy the bonds they think will be upgraded as such a move will cause a lot of arbitrary buying by index trackers.

FINSUM: There were huge downgrades last year as the pandemic wiped out prices in big parts of the sector. Now, with the economy resurgent, big upgrades look likely, which should give the whole asset class wings.

(New York)

Until every recently (and even now), junk bond yields were historically low. This was not a surprise since Treasuries were also at historic lows. But the whole situation begs an important question—why are junk bonds so popular when their yields are so low? It seems like an abundance of risk with little return. The answer to the question is that “there is no alternative”. Many fund managers have mandates to invest in a minimum holding of bonds, no matter what their yields. Therefore, when that cash needs to find a home in fixed income, it naturally finds its way towards the highest-yielding bonds, even if those might be quite risky. This helps explains the huge decline in yields since March 2020 (from an average of 12% yield to under 4% in February).

FINSUM: “There is no alternative” (TINA), is the same explanation given for the big rise in equities since after the Financial Crisis, and even since the beginning of the pandemic. Frankly, the argument seems to hold water.

(New York)

High yield bonds are in an interesting place. After yields fell very low during the core of the pandemic, the bonds looked relatively less attractive. Now, jumping Treasury yields have hit the asset class, but junk credit is relatively less affected because of its shorter maturities and higher yields. The reality though, is that even with things starting to look better given the recovery in the economy, it is a risky time. Therefore, junk debt is an area where active management might be the right choice. Individual credits can react very differently to market forces, and it takes a good deal of research to really understand the companies.

FINSUM: High yield managers are known for resisting the excesses of their asset class, something that index funds cannot do. Therefore, in risky times, it might be a good idea to stay active.

(New York)

Even before the pandemic and subsequent crisis, the high-yield Muni market failed to deliver the returns after taxes that the corporate bond market…view the full story on our partner Magnifi’s site

(New York)

If investors’ eyes are watering from the big jump in yields over the last month, no one could blame them. The steep rise has sideswiped markets and until today, sent the Nasdaq into a full blown correction, with the rest of the market down strongly too. So how can investors protect their portfolios from losses because of yield jumps? One asset class to consider are rate hedged ETFs, such as the ProShares Investment Grade-Interest Rate Hedged ETF (Cboe: IGHG) and ProShares High Yield Interest Rate Hedged ETF (Cboe: HYHG). Both funds go long corporate bonds and short Treasuries, which allows them to remove rate risk, but still keep the benefit of income streams from the underlying corporate bonds.

FINSUM: Rates usually rise when the economy is improving, as is happening now. In these periods, corporate bond spreads usually tighten. So this type of ETF allows you the benefit from the increasing attractiveness of corporate bonds while also protecting against interest rate risk.