Nice Piece on HY

September 30th, 2014 2:42 pm | by John Jansen |

Via Barrons:

Junk Bonds Tanking In September, Down 2.4

The high yield bond market is on track to close September with a 2.47% loss, including a 0.25% loss yesterday and a 1.54% loss over the past week, per a benchmark Bank of America Merrill Lynch index. That’s cut the market’s 2014 return to 3.22% and lifted the market’s average yield to 6.455%. It was barely over three months ago that the market’s average yield fell to an all-time low just under 5%; at that point 2014 returns already totaled 5.34%. In late July, the market saw a brief but intense pullback, but rebounded in August before the latest slide. The current malaise has been enough to cause five companies to postpone planned high-yield bond offerings.

I’ve gone hoarse in this blog and my Current Yield column warning that the high yield market has been on precarious footing all year, with high valuations, liquidity problems and Federal Reserve rate-hike expectations leaving the market prone to the occasional selloff, even as defaults remain a distant concern. Add to that the recent market volatility after Bill Gross’s exit from Pimco and the high yield market will be happy to see this month end tomorrow.

Adrian Miller of GMP Securities says the latest stumble has been led by exchange-traded funds, as more big fund managers use ETFs to make bets on the broader market. The iShares iBoxx $ High Yield Corporate Bond Fund (HYG) is down 2.7% this month, and the SPDR Barclays Capital High Yield Bond ETF (JNK) is down 3.1% in September. Here’s Miller:

The high yield market witnessed a situation where the ETF tail has been effectively wagged the HY dog due to a combination of Fed rate hike speculation, PIMCO headlines and geopolitical tensions. Indeed, last week the HY market dropped -1.35% (YTD: 3.485%) as cash spreads jumped +43bp to 440bp, wider than the recent high of 425bp on August 1st tied to a flare-up in Ukraine and the widest since November 14, 2013. At the same time the market’s yield jumped +57bp to 6.363%…. And while the cash HY market was clearly under duress, HY ETFs underperformed. HYG dropped -1.8% for the week as the JNK fell -1.6%….

The unfortunate developments for U.S. risk in general and U.S. HY in particular is persistent global macro events and Fed speculation that continues to cloud a near to intermediate term solid fundamental backdrop for credit and to a lesser extent equities. Indeed, we still hold the view that the underlying fundamental backdrop is favorable for credit…. So when the current weakness ends, we look for HY to recover and spreads to narrow. However, given the nature of the current geopolitical concerns, these events are not going away anytime soon and could continue to weigh on the HY market over the near term.

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