The US Fixed Income Market
By Heather Rupp, CFA, Director of Communications and Research Analyst for Peritus Asset Management, Sub-Advisor of the AdvisorShares Peritus High Yield ETF (NYSE Arca: HYLD)
The U.S. fixed income market is massive at around $40 trillion.1 The largest subcategory is U.S. Treasury debt. Mortgages represent the second largest single subcategory of the bond market; this helps to explain why problems in the mortgage market nearly took down the entire financial system in 2008. Yet, a sizable 22% of the fixed income universe is represented by “corporate credit” through leveraged (floating rate bank) loans, high yield bonds and investment grade corporate bonds, together making this category even larger than the mortgage market.
What comes as a surprise to many investors is that the non-investment grade sector of loans and bonds has grown to become a major asset class itself, now over $2.5 trillion. By looking at the chart above, it is obvious that corporate credit plays a major role in financial markets and high yield bonds and floating rate loans a significant piece within that.
These are large and growing areas of the market and worthy of investor’s attention. We have recently written about the idea that high yield bonds can offer investors both higher yields and lower duration relative to other fixed income asset classes, and have posted higher returns over the past twenty five years (see our pieces “High Yield Bonds and Rates: Duration and Yield” and “Where to Go?” for specific details and data). As we noted in our commentary last week, we have the flexibility to include both high yield bonds and floating rate loans within our portfolio, which we believe allows us to expand our investment universe, focusing on where we see the most value relative to risk. These are deep markets with thousands of issuers, allowing us ample opportunity for security selection as we work to meet our investment object of a high current income with the potential for capital gains, all the while working to manage risk.
1 From the publication “Outstanding U.S. Bond Market Debt” release by SIFMA, data as of 3/31/16. Koch, Fer, Miranda Chen, and James Esposito. “CS Credit Strategy Monthly,” Credit Suisse US Credit Strategy. April 11, 2016, p.16, 42