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Posted by on Oct 13, 2015 in Market Insight, Peritus Asset Management

Fear Mongering in the High Yield Market

Fear Mongering in the High Yield Market

By Heather Rupp, CFA, Director of Research for for Peritus Asset Management, Sub-Advisor of the AdvisorShares Peritus High Yield ETF (HYLD)

There have recently been a few high profile investors that have spoken out against the high yield market, with Carl Icahn among the more vocal.  While Icahn may have an agenda or perhaps a short trade in high yield, it is peculiar that he is so vocal against high yield bonds, calling it a bubble, when many of his equity purchases also are high yield issuers, not to mention his Icahn Enterprises is an issuer of high yield bonds.

Looking at Icahn’s top ten equity holdings, over half of them are not rated or high yield bond or loan issuers.  If the high yield bonds are so risky, the equities would be infinitely more risky, as equity ranks below bonds in the company’s capital structure and if Icahn’s concern is bankruptcies in this “bubble” market, the bondholders would have to get paid back before there is any value to the equity.  If he is concerned about the risk for high yield issuers, his warnings versus his holdings don’t add up.

Above and beyond this, we believe he is very hard pressed to call the high yield market a bubble.  As we have written about previously, a bubble implies investors piling into a sector, bidding it up well above its fundamental, intrinsic value.  First off, there has been no massive piling into the high yield sector.  In reality, high yield mutual and exchange traded fund flows have actually been negative for the last two years.  Second, by no means is the high yield market at the sort of ridiculous valuations you see in bubble markets.  The current spreads offered by the high yield market of 709bps are nearly 30% above the historical median levels of 546bps.1

Rather than listening to the fear mongering, we believe that today’s high yield market is more than compensating investors for the risks within it, and offers active investors compelling value.  Yes, there will likely be some pain to come in certain credits, but active managers are able to do the fundamental analysis to determine the vulnerable companies from the fundamentally sound, undervalued opportunities.
1 Acciavatti, Peter Tony Linares, Nelson Jantzen, CFA, Rahul Sharma, and Chuanxin Li. “Credit Strategy Weekly Update,” J.P. Morgan North American High Yield Research, October 2, 2015, p. 29.

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.