Bonds: High Yield

(New York)

It is time to get out high yield. The sector has been seeing heightened fears for months, and prices have performed so well in the first two months of the year, that there is little value left. High yields returned 6.4% in January and February after the market came to a virtual standstill at the end of 2018. Part of the reason for the outperformance is that investors are demanding less spread to Treasuries, a fact that has not carried over to the investment grade market.


FINSUM: The pendulum has swung too far, and investment grade bonds now appear a much better value than high yield.

(New York)

Today we wanted to write a story covering the topic of rate hedged ETFs. We have been examining these lately and feel they are in high demand because of the need for stable income for retirees and the still-relevant threat of higher rates. Mortgage REIT ETFs, such as iShares’ REM really caught our eye with 9%+ yields. However, they are very rate sensitive, so we wanted to find a better option. Enter ProShares’ HYHG, or the High Yield-Interest Rate Hedged ETF. The fund yields over 6% in a highly hedged manner, it goes long high yield US and Canadian debt and simultaneously shorts US Treasuries. The expense ratio is 0.50% and the fund has $127 under management.


FINSUM: This seems like a great fund to us—6% income with only 50 basis points in fees, all in a rate hedged package.

(New York)

High yield had a very bleak run to finish 2018. The asset class went over 40 days without a single sale as the junk credit market seized up. However, it has made a comeback in a major way. The first five weeks of 2019 saw a staggering 5.25% gain in the Bloomberg Barclays US Corporate High Yield Index. New issues were quite oversubscribed (more than double), and the general mood has completely shifted.


FINSUM: The Fed backing off on rates sure makes a difference! It is interesting the market reacted this sharply given that high yield is relatively more insulated from rates. In our view, the turnaround is largely a relief rally that the Fed won’t push the economy into a recession.

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