The free falling oil price has caused energy sector high-yield bonds to fall 20% so far this year, with many experts warning worse is to come.
Bob Michele, Global CIO and head of Fixed Income, at J.P. Morgan Asset Management says this has created opportunities in the US high-yield market.
“Yields have increased and the difference in the yields on high yield versus those on less risky securities has widened.” Says Michele. “This is known as a credit spread. This spread reflects the net yield an investor can earn by holding a security that has more credit risk and it is often cited in reference to the yield on a typical benchmark like U.S. Treasuries.”
Michele went on to say that: “a 4.5 percent credit spread is very generous compensation for credit risk in an environment in which defaults are running at 1 percent. And high-yield passes the sniff test as well. Companies have run conservative balance sheets, and they’re being careful in what they spend. For us, as lenders of our clients’ money, it’s a great time, and the past couple of months have created some good value.”
“The best returns over the coming year are going to be for managers who are invested, have yield in the portfolio and hold interest paying securities. The party won’t end until the Fed takes away the punch bowl. And they haven’t even started yet.”
Todays Other Top Stories
Learn Bonds: – Economic and interest rate forecast for 2015. – In spite of the recent dovish comments by the Fed, our base case scenario is for the Fed to begin tightening at the September 2015 FOMC meeting. However, there is a chance that the Fed tightens in June and a chance it tightens in 2016. Bond Squad’s opinion is that structural economic sluggishness in Europe and Japan persists.
Bloomberg: – California debt hangover lingers amid fiscal gains. – California, which has won the biggest gains in creditworthiness of any U.S. state since the recession ended in 2009, may find further improvement stymied by a $350 billion bill for municipal bonds and retiree costs.
Bloomberg: – Radian to sell bond-insurer unit to Assured Guaranty. – Radian Group Inc. (RDN) agreed to sell its bond guarantor to Assured Guaranty Ltd. (AGO) for $810 million to free up capital as the company prepares for tighter oversight of mortgage insurance.
Citywire: – U.S. bond sell-off fears ‘really overblown’, says JPM’s Sheikh. – Long-term developed markets bonds look attractive as the back end of the US Treasuries curve may flatten further causing yields to drop lower.
Time Money: – Here’s what to expect from the bond market in 2015. – Bond investors are keeping a close eye on the Fed to see if Janet Yellen pushes for a short-term interest rate increase.
Morningstar: – Despite the Fed’s more dovish tone, expectations remain the same. – Retailers’ bonds outperform while energy bonds continue to underperform.
Forbes: – The amazing ten-year Treasury. – At the beginning of 2014, the Ten-Year Treasury was yielding slightly over 3.0%. In the past few weeks, it breached the 2.10% mark. This translated to a total return exceeding 20.0% through the end of November. However, since interest rates cannot continue to fall indefinitely, this performance cannot be sustained. When interest rates finally rise, if the rise is fast and steep, this segment of the financial markets will experience great difficulty. What does the immediate future hold for bond yields?
CNBC: – Treasurys extend losses after raft of US data. – U.S. Treasury prices dipped on Tuesday after data showed the economy grew at its quickest pace in 11 years in the third quarter, and before the government was due to sell $35 billion in new five-year notes.
High Yield Bonds
Market Oracle: – Stock market crash and high yield debt. – Since late 2008, the unprecedented quantitative easing (QE) that flooded our economy has produced another terrible consequence — the unbelievable mispricing of high-risk, high-yield bonds.
Bloomberg: – Subprime angst fades as 12% return trounces junk. – Remember when nobody wanted to touch U.S. subprime-mortgage debt? That’s just a distant memory as it delivers some of the bond market’s best returns today.
Bonner & Partners: – Time to review junk bond risks. – If you own a high-yield bond fund, now’s a good time to review the risk it poses to your portfolio.
Bloomberg: – Cuba’s hot defaulted bond market carries buyer-beware label. – If anyone in the U.S. knows the market for defaulted Cuban debt, it’s Leo Guzman. The walls of his Coral Gables, Florida-based brokerage firm are covered with the remnants of a market that once flourished in the U.S.. So when Guzman, 68, says that investors’ sudden interest in snapping up the debt for pennies on the dollar is premature, it’s worth listening to.
Institutional Investor: – Setting standards for transparency in green bonds. – As green bonds grow more popular, there is greater demand for a clear definition of environmentally friendly investments.
Barron’s: – 4 Reasons to broaden your fixed income playbook. – Do bonds still make sense? For generations of investors, bonds have played an important role in portfolios, protecting capital, providing income and serving as a diversifier and counterweight to equity market volatility.
ValueWalk: – Convertible Bonds: The Rodney Dangerfield of liquid alts. – Convertible bonds are like comedian Rodney Dangerfield: They get no respect. Convertibles are overlooked because they are hard to label and underappreciated because they are not as sexy as stocks. So convertible bonds are relegated to a supporting role in a portfolio. But after many years of consistently strong performance, convertibles are ready for a leading role.
Citywire: – Legg Mason’s five key calls for 2015. – Legg Mason and its subsidiaries highlight five asset classes they expect to perform strongly next year.
Kiplinger: – 5 Great ETFs for 2015. – Beating the market isn’t nearly as important as not getting creamed. That means sticking mainly to blue chips both here and abroad, taking special care in emerging markets and limiting interest-rate sensitivity in bonds. With that in mind, below are my five favorite ETFs—in no particular order.
Investors.com: – First trust’s new active ETF soaks up Pimco outflow. – Pimco, the California-based investment giant, continues to dominate active ETF market share. But First Trust is nipping at its heels.
ETF Trends: – Use ETFs to maintain your core bond exposure. – More active funds have added high-yield bonds to supplement income in a low-yield environment, potentially overexposing investors to volatility. Instead, one can utilize exchange traded funds to better control credit risk.
Benzinga: – The best bond ETF of 2014. – With just a handful of trading days left in 2014, the race for the best performing fixed-income ETF of the year has virtually been decided.
Best scenario for 2015 would be a down year for financial assets. Both stocks and bonds need a breather. Fits in with Fed tightening.
— Ed Bradford (@Fullcarry) December 23, 2014
Kiesel CIO: US economy in mid-cycle with the consumer healthy. Remain over-weight US consumer cyclicals in 2015.
— PIMCO (@PIMCO) December 23, 2014
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