The Bloomberg Barclays US Corporate High Yield Index currently is yielding approximately 5.50%, or 400bps in spread. The green arrow illustrates where the high yield market is currently priced and the projected returns from a historical standpoint. They are the lowest in the history of high yield with expected returns between 3% to 5%.
That said, we are not extremely negative on high yield. We do not foretell a recession or defaults picking up markedly. We believe the economy is strengthening and high yield could continue to grind along. An investor could continue to clip a coupon and have a fair return. However, the risk adjusted return setup is not great at this point in the cycle. One should not expect any price return and investors leave themselves open, if there is any sort of market correction, to see prices go down. Additionally, it is interesting to note the high yield index has recently seen its duration pickup to approximately 4 years, highlighting more interest rate sensitivity whereas high yield traditionally has not had much sensitivity to rates.
In this scenario, if rates aggressively moved higher, high yield could suffer. One further note, many high yield bonds are negatively convex because they trade at or near their call prices. This means they just have little appreciation ability; which again highlights little more than coupon returns.
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Stephen Selver is the CEO at Bramshill Investments, an asset management firm specializing in absolute return solutions within fixed income and income producing assets. Click here to view his bio and other team members of Bramshill Investments.
This commentary is provided by Bramshill Investments, LLC for informational purposes only and may contain information that is not suitable for all investors. Certain views and opinions expressed herein are forward-looking and may not come to pass. Investing involves risk, including the potential loss of principal. Past performance may not be indicative of future results, which are subject to various market and economic factors. No statement is to be construed as an offer to sell or a solicitation of an offer to buy securities, or the rendering of personalized investment advice.