Rates and Returns, 2013 versus 2015
By: Heather Rupp, CFA, Director of Research for for Peritus Asset Management, the sub-advisory firm of the AdvisorShares Peritus High Yield ETF (HYLD)
Given the recent move in Treasury yields, with the 10-year U.S. Treasury yield up over 30bps in just the last 30 days, the concern about interest rate risk is heating up again. As we have written about in the past, high yield bonds have historically done well during periods of rising rates (see our pieces “High Yield in a Rising Rate Environment” and “Strategies for Investing in a Rising Rate Environment“).
Interestingly, so far 2015 seems to be mirroring 2013, where the 10-year Treasury yield rose from 1.86% to 3.04%, with rates being fairly tame in the first five months of the year, and then started to spike in May.1
While the Fed will certainly be raising rates at some point, the timing and extent of the move we’ll see this year is anyone’s guess. As rates ultimately rise, we would expect to see a larger move in the shorter bonds, but don’t expect to see a huge spike in the medium to longer term bonds (5 and 10-year bonds). But what if we are wrong and see a repeat of 2013, where the 10-year rate almost doubled? Just how did various asset classes perform during that period?
During 2013, high yield bonds and loans posted solidly positive returns versus other income-generating asset classes.2
Over the course of 2013, high yield bonds and loans posted a return of 7.44% and 5.39%, respectively, versus -1.53% for investment grade corporates, -2.55% for municipal bonds, -0.17% for preferred stocks and 1.78% for real estate.
Looking specifically at the fixed income asset classes, duration is a measure of interest rate sensitivity. As you can see, both back in the beginning of 2013 and the beginning of 2015, the high yield bond market had a significantly lower duration than both investment grade corporates and municipal bonds, while high yield loans have floating rates so are considered to have minimal interest rate sensitivity.
While of course past performance is no guarantee of future results, this does go to show how various asset classes have responded in recent history to a significant rise in rates. Given the lower duration of the high yield bond market and higher starting yields, we would expect this asset class to weather a move in interest rates well, as it historically has.
1 Data sourced from the U.S. Department of the Treasury. 2013 10-year Treasury yields/rates cover the period of 1/2/13-12/31/13 and 2015 covers the period 1/2/15-5/12/15.
2 Barclays Capital U.S. High Yield Index covers the universe of fixed rate, non-investment grade debt. Barclays U.S. High-Yield Loan Index, also known as the Bank Loan Index, provides metrics for the universe of syndicated term loans. 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. Barclays Municipal Bond Index covers the long-term, tax-exempt bond market. Performance (total return) data for the period 12/31/12-12/31/13 and modified adjusted duration provided as of the listed date, source Barclays Capital. The S&P U.S. Preferred Stock Index is designed to measure the performance of the U.S. preferred stock market, including stocks that pay dividends at a specific rate and receive preference over common stock. The Dow Jones U.S. Real Estate Industry Group Index is a subset of the Dow Jones U.S. Index and represents Real Estate Investment Trusts (REITs) and other companies that invest directly or indirectly in real estate through development, management or ownership, including property agencies. Preferred stock and Real Estate index data sourced from Bloomberg and performance covers the period 12/31/12-12/31/13.