By Anthony Tanner, CFA
SWP Guest Contributor
We see great potential opportunities in the high-yield corporate bond sector for the following reasons:
- High-yield bonds provide much higher income in the short-term, and greater potential total returns long-term, derived from the more reliable stream of income rather than uncertain and volatile market appreciation/ capital gains.
- They’ve cheapened along with the equity markets, and now offers attractive high single digit return prospects.
- The downside risks of the sector have lessened as the present “yield spread” has grown to almost 300 basis points above historical long term averages, which reduces both potential volatility and the likelihood of negative total returns going forward.
The yield spread in this sector (the additional yield offered over high-quality US Treasury bonds) has doubled since reaching the last cyclical low in 2014. As a result, the average amount of extra yield has risen from around 400 basis points to over 800 basis points! This is well above the long run average of about 530 basis points.
Source: Credit Suisse. Yield spreads represented by the Credit Suisse High Yield Index.
This spread widening has created great value in the sector for two reasons. First, market yields at are now at levels that provide very attractive, inflation adjusted income. The sector can provide yields in excess of 6%, which compare favorably to both taxable and tax-exempt yields.
As of this writing, US Treasury yields and investment grade municipal bond yields have actually declined in the past 30 days:
|
|
US Treasury | Municipal Bonds | ||
|
Maturity (Yrs) |
Yield | Change | Yield | Change |
|
2 |
0.71% | -0.33% | 0.61% | -0.12% |
| 5 | 1.25% | -0.49% | 1.02% |
-0.27% |
| 10 | 1.87% | -0.38% | 1.68% |
-0.30% |
| 30 | 2.70% | -0.28% | 2.68% |
-0.19% |
Second, high yield bond prices have cheapened substantially, reducing downside risks and increasing the long term total return potential of the sector.
Source: Credit Suisse. As of Nov. 30, 2015.
IMPORTANT DISCLOSURE INFORMATION
Past performance is no guarantee of future returns. It is not possible to invest directly in an index. Investing involves risk and possible loss of principal capital.
The views expressed in this content are as of the date indicated, and are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be direct investment, accounting, tax or legal advice to any one investor. Consult with an accountant or attorney regarding individual accounting, tax or legal advice. No advice may be rendered, unless a client service agreement is in place.
All information has been obtained from the following sources: CREDIT SUISSE. Each source is believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.