Displaying items by tag: high yield
High yield stocks have been wounded during the pandemic. The 100 worst performing S&P 500 stocks since the pandemic began have returned minus 39% and yield an average of 3.07%; the top 100 have returned over 35% and yield just 0.85%. However, now might be the time to buy in as there are some exceptional values. The core idea is that many of these wounded names are going to be bid up over the next several months as yield-starved investors try to find some income.
FINSUM: Right now it is very important to be selective about dividend stocks, as their returns are all over the map. For example, the Vanguard Dividend Appreciation ETF (VIG) has returned 4% this year, while the iShares Select Dividend ETF has returned minus 18%! The reason why is that the latter was weighted towards utilities and financials, which have suffered. Be careful what you choose!
Anyone who has been looking at the bond markets is likely to be shocked at the recent moves in the space. Many “high yield” bonds (it is now necessary to use quotes) are yielding what very high quality investment grade bonds were just months ago. A recent sale saw $1 bn of new issuance for a BB+ company at a 3% yield. The huge move downward in bond yields is the result of the Fed’s unprecedented stimulus action, and in particular, their mandate to backstop corporate bonds.
FINSUM: The Fed’s actions have been so warping that they have called into question the very definition of a high yield bond. If every bond is backed by the Fed, then it makes perfect sense that their yields would equalize. In this way the market’s reaction is entirely predictable.
Junk bonds have been on a tear lately. July was the best month for the asset class in nearly nine years, with overall returns near 5%. The average junk bond yield fell from 6.85% to 5.46% over the course of the month on the back on continued monetary and fiscal stimulus. The market has risen so much that many are questioning if they have already missed the opportunity. To this question, one high yield fund manager says “I don’t think so . . . Governments across the world want to make sure credit is working properly”.
FINSUM: As long as sovereign yields stay super low and the Fed and government keep the life lines open, it is easy to imagine yields will keep falling for junk.
While some are saying that we are in “TINA” mode with equities (i.e. there is no alternative), high yield bonds have been seeing a big influx of demand. Because dividends are drying up in the stock market, high yield bonds are becoming increasingly attractive, and Bank of America thinks they are going to do well. They point out that yields in some bonds are much higher than similar yields on equities in the same sector and they expect spreads to tighten in the coming quarter. “While the easy money was last quarter, we still see many tailwinds to nudge high-yield spreads tighter in Q3...Markets should be treated to plenty of positive data surprises now that economies are exiting their lockdown hibernation…an essential ingredient for leveraged credit to perform.”
FINSUM: This seems like a reasonable call, but we think the positive data surprises might be a stretch. That said, yield-hungry investors will likely keep the high-yield space humming along.
Big debt investors are pouring dollars into risky debt markets and products, such as CLOs and their subprime-backed assets. Why you may ask? (as anyone might right now) The answer is that the riskiest borrowers are surviving this downturn much better than anyone expected. Spreads between subprime-backed products and US Treasuries have narrowed sharply, while new deals have seen big demand. According to an analyst at Loomis Sayles “What is surprising is how strong credit performance has been … Fiscal policy is really keeping the subprime borrower afloat”.
FINSUM: Regardless of whether or not you are involved in this market, it is good news that the demand for these securities is actually being driven by fundamentals. It is both a sign of economic resilience, and also of market rationality.