High Yield Market Conditions

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As we all know, the Fed held rates steady last week and while they kept the door open for a December rate hike, they certainly didn’t indicate it is a foregone conclusion. There are a number of important data points to watch over the coming months, not to mention an important election, which may well impact the outlook for markets and rates. So just how is the high yield market positioned in this environment?

First, we believe that that high yield market remains an attractive area for investors looking for income and yield. While we have seen strong performance for high yield so far this year and spreads come in from the 2016 lows, we still see value here and further room for spread tightening. As we argued at the time, the decline in high yield that we saw in late 2015 and early 2016 was way overblown given the fundamentals of many of the credits in the high yield space. Yes, at the time, energy and other commodity prices were in free fall and the entire high yield market seemed to be taking cues from that as selling pressure was widespread across industries. In the months since the February lows in the market, we have seen stability in energy and other commodity prices and have seen investors begin to pay attention to fundamentals once again in non-commodity credits. The issues in commodities are now pretty well known and the impact from these prices on the companies is visible, while the stable fundamentals outside of commodites is also visible. Commodity related defaults have been by and far the major source of the spike in defaults so far this year, and now seem to have peaked, as defaults have begun to decline in the most recent month. All the while, default rates in non-energy/commodity credits remain near historic lows.

On the technical side, we believe we are seeing a healthy market in terms of fund flows. It certainly hasn’t been a one-way trade in fund flows over the recent months, with money blindly flowing into the market. Rather, we have seen many weeks of inflows, but also some weeks of outflows, in some cases large outflows—a give and take that you’d expect during normal, healthy market conditions.1

Yet, interest remains strong in the primary market, as we have seen pretty steady new issuance over the past few months (of course excluding the seasonal end of summer slowdown). This is allowing companies to lower interest rates and extend bond maturities, which we believe further positions the issuing companies well for the future.

The Fed action, as well as actions by central banks in Europe and Asia, indicate this low rate environment will continue for now. In the midst of this, we believe that today’s high yield market is offering attractive yield to investors given the fundamentals of the underlying credits, especially compared to many other asset classes out there. 1 Leverage Commentary and Data, www.lcdcomps.com. Based on weekly reported fund flow information, including Jon Hemingway, “HY funds outflows moderate to $273.5M this week,” 9/22/16; Jon Hemingway, “HY funds see $899M of inflows in latest week,” 8/18/16; Matt Fuller, “US HY fund flows turn negative with ETF-heavy outflow,” 5/26/16.

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.

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