October 15 on Blackrock
BlackRock‘s fixed income head, Rick Rieder, says the firm has been adding to its high-yield bond holdings during recent days as the 10-year Treasury yield has plunged, capped by this morning’s free-fall that sent the 10-year yield below 2% for the first time since May 2013 before it rebounded to 2.05%.
Calling it “a bit of a crazy day,” Rieder says the rally followed a confluence of disappointing economic indicators, along with renewed worries about the spread of the Ebola viris, and those contributed to an unwinding of popular trades, namely long-dollar trades, shorts aimed at the front end of the Treasury yield curve, and long positions in risk assets, particularly stocks....
Rieder says BlackRock has been adding to its high-yield corporate bond holdings recently. “High yield is actually holding up incredibly well relative to everything else,” he says. “If nominal yield s are going to be persistently lower, led by other parts of the world, then high yield at 6.5% or 6.75% [yields] is not bad compared with a 10-year [Treasury] at 2%.”
For months, high-yield bond market guru Martin Fridson has been warning about overvaluation, first calling the market “extremely overvalued,” then upgrading that to “way, way overvalued” in May. After the market suffered a brief but intense sell-off in late July, Fridson removed the extreme overvaluation tag, or at least the “extreme” part of that label.
Today Fridson says the market, at long last, is back to being undervalued, or at least “moderately undervalued.” This comes after high yield got pounded amid yesterday’s broadermarket antics, which followed a more prolonged period of weakness.
Fridson, now chief investment officer at wealth management firm Lehmann Livian Fridson Advisors LLC, bases his assessments on his own model for high-yield bond spreads. The market’s average spread has climbed to 508 basis points (yielding 5.08 percentage points more than comparable Treasury bonds) as of the end of the day yesterday from a low of about 340 bps earlier this summer, per a benchmark Bank of America index.
And October16 on UBS
The high–yield bond market has been suffering lately, and yesterday’s bizarre, wild ride for bonds and stocks alike didn’t do junk bonds any favors, with that market down another 0.55% yesterday, per a benchmark Bank of America Merrill Lynch index. High yield is now down 1.5% over the past week, 2% over the past month and 2.8% since July, trimming year-to-date returns to 2.5%.
Where there’s a rout, there’s a buying opportunity. The average high-yield bond spread over Treasuries has climbed to 508 basis points, meaning junk bonds now yield more than 5 percentage points more than comparable Treasuries. That’s up by 1.6 percentage points from the low spread of about 340 basis points seen in June, when the average junk-bond yield hadfallen to a record-low just under 4.9%. The market’s average yield is up to a much healthier 6.49% today.
Yesterday BlackRock said it’s been buying more junk bonds lately, particularly with high-yield bond yields moving in the opposite direction of plunging Treasury yields. Today UBS Wealth Management says it too is adding to its high-yield holdings,
Here’s what UBS has to say today:
We believe there has been shift in the relative attractiveness between the equity risk premium and the more defensive credit risk premium, and we add to overweight position in US high yield credit. The recent sell off provides a spread to Treasuries of c. 500bps, or an absolute yield-to-worst of c.6.3%. With the fundamental economic situation in the US still positive, we expect default rates to remain below 2%, allowing for a total expected return of 5-6% over the coming six months, based on our forecasts.
Here is a 10 day price chart of HYG the largest high yield bond ETF
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