Pages Menu
TwitterRssFacebook

Posted by on Jul 14, 2016 in Market Insight, Peritus Asset Management

Where to Go?

Where to Go?

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)

 
We are in the midst of a global low yield environment.  Yields on the 10-year bonds (yes, 10 years) for Switzerland, Japan, and now Germany are negative, and yields are under 0.50% for much of Europe.1
 
2016.07.14_Peritus1

With the Fed meeting and announcement earlier last month and the post-Brexit vote uncertainty, the US 10-year Treasury yield is now sub 1.5%.  In just a matter of a several weeks with one bad jobs report and the Brexit vote in the UK, we have gone from a likely interest rate hike this summer to many questioning if we’ll even see another hike this year…and even some talking of potential stimulus on the horizon.  So it appears that yields on government bonds will be stuck at these very low levels for the foreseeable future.

With the US 5-year Treasury currently yielding 1.0% and the 10-year sub-1.5%2, versus a core inflation number around 2%, where is an investor to go to generate some return?  Municipal bond yields are also under 2%, with this segment of the market currently yielding around 1.6%.  Investment grade isn’t much better, with yields there under 3.0%.3
 
2016.07.14_Peritus2

In this low yield environment, it seems like investors are turning to equities as they just don’t know where else to go.  With dividend yields also right around 2%4, investors aren’t getting much in the way of income here either.  Their bet must be that equity prices will appreciate, but given the currently high equity valuations relative to history and the outlook for the global economy, we see little in the way of catalysts to move equities sustainably higher; rather, we see downside risk in this asset class.
 
2016.07.14_Peritus3

If you are trying to save for retirement, you need to be making a decent amount of money above and beyond inflation.  In the hunt for yield, we believe that the high yield corporate debt market offers investors an attractive place for investment.  As noted in the chart above, high yield bond yields, currently about 7.5% on the index, are well above those offered by other fixed income alternatives, including investment grade, treasuries, and municipals.  High yield has also outperformed these other fixed income asset classes over the past 25 years.5
 
2016.07.14_Peritus4

Looking at high yield versus equities (S&P 500 Index) over the past 25 years, high yield has performed relatively equivalently with nearly half of the risk (as measured by annualized standard deviation), leading to high yield notably outperforming on a risk adjusted basis (return/risk).6
 
2016.07.14_Peritus5

As global risks increase with the Brexit implications on top of an already tenuous global economy we would expect this low rate environment to continue for the foreseeable future.  And given the large multinationals that dominate the equity markets and indexes, we do expect the lack of global demand and currencies to continue to have a drag on earnings.  However, in today’s environment of low yields virtually across the board, we view the high yield market as an attractive opportunity for those looking to generate some yield, as well as potential capital appreciation as much of the high yield market is priced at discounts to par.  We view valuations (spreads) in high yield as reasonable and issuers tend to be much more domestic/North American focused, so we would expect less exposure to the global environment/Brexit.  We believe high yield debt offers investors attractive return potential as we move forward.
 
1 Data sourced from Bloomberg, as of 6/29/16.

2 Data sourced from the U.S. Department of Treasury website, Daily Treasury Yield Curve Rates, and data as of June 28, 2016.

3 Barclays Capital U.S. High Yield Index covers the universe of fixed rate, non-investment grade debt (source Barclays Capital).  U.S. 5 Year Treasury Note is the on-the-run Treasury (source Bloomberg).  Barclays Corporate Investment Grade Index consists of publicly issued U.S. corporate and specified foreign debentures and secured notes that meet the specified maturity, liquidity, and the quality requirements (source Barclays Capital).  Barclays Municipal Bond Index covers the long-term, tax-exempt bond market (source Barclays Capital). All data as of 6/28/16.  The yield to worst is the lowest potential yield that can be received on a bond, without the issuer actually defaulting, and includes the various prepayment options such as call or sinking fund.  The spread is the spread to worst based on the yield to worst less the yield on comparable maturity Treasuries.  The coupon is the annual interest rate on a bond.

4 Data sourced from, http://www.multpl.com/s-p-500-dividend-yield/, monthly data from 1/31/80 to 6/17/16.

5 The BofA Merrill Lynch US Corporate Index tracks the performance of US dollar denominated investment grade corporate debt publicly issued in the US domestic market. The BofA Merrill Lynch US Municipal Securities Index tracks the performance of US dollar denominated investment grade tax-exempt debt publicly issued by US states and territories, and their political subdivisions, in the US domestic market. The BofA Merrill Lynch US High Yield Index tracks the performance of US dollar denominated below investment grade corporate debt publicly issued in the US domestic market.  Data as of 3/31/16, sourced from Bloomberg.

6 Credit Suisse High Yield Index data from Credit Suisse. The Credit Suisse High Yield Index is designed to mirror the investible universe of the $US-denominated high yield debt market. S&P 500 numbers based on total returns. Period covered is 5/31/91 to 5/31/16. Calculations based on monthly returns and standard deviation is calculated by annualizing monthly returns. Return/risk is based on annualized total return/annualized standard deviation. Although information and analysis contained herein has been obtained from sources Peritus Asset Management, LLC believes to be reliable, its accuracy and completeness cannot be guaranteed. This report is for informational purposes only. Any recommendation made in this report may not be suitable for all investors. As with all investments, investing in high yield corporate bonds and other fixed income securities involves various risks and uncertainties, as well as the potential for loss. Past performance is not an indication or guarantee of future results.

 

Although information and analysis contained herein has been obtained from sources Peritus I Asset Management, LLC believes to be reliable, its accuracy and completeness cannot be guaranteed. Information on this website is for informational purposes only. As with all investments, investing in high yield corporate bonds and loans and other fixed income, equity, and fund securities involves various risk and uncertainties, as well as the potential for loss. Past performance is not an indication or guarantee of future results.

The AlphaBaskets blog provides frequent market insight and commentary by AdvisorShares Investments, LLC, created by AdvisorShares and other leading active managers.  AdvisorShares Investments is an SEC-registered investment adviser and the investment adviser to the AdvisorShares actively managed ETFs. The views expressed on AlphaBaskets should not be taken as investment advice or a recommendation for any of the actively managed ETFs advised by AdvisorShares.

X