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Loomis Sayles' Matt Egan issues a bit of a warning on high-yield, noting their only upside at...

Loomis Sayles' Matt Egan issues a bit of a warning on high-yield, noting their only upside at this point is the coupon (not something to sneeze at). If prices rise any further, expect issuers to refinance into lower rates. The downside is defaults, and with the default rate as low as it currently is, they can only go in one direction.
Comments (5)
  • i agree on all points except the last. while i would not expect overall default rates (and one should really look at them on a ratings-basis) to go down, i dont expect them to move meaningfully up, either. if one is following the huge refinancing which has occurred in both the HY loan and bond market (and which is steaming ahead at least until the holidays finally arrive), we've been on a multi-year surge on refinancings (which Egan himself indirectly notes) which have pushed out the next leveraged credit market "cliff" for several years. this is even more so given the high refinancing rate (with better terms, too) of shorter duration leveraged loan.

     

    even if the economy remains at its current lackluster growth rate, even if we head over the fiscal cliff, many/most of these companies have stockpiled cash and reduced capex spending and would likely do OK. if we get a fiscal cliff agreement, economic growth will rise and operationally these companies should be in a much better place.

     

    the real risk here is to investors HY loans and bonds. on the one hand, total return in this environment will likely be no better than the coupon yield, and in the worst case, rising rates will erode prices and spreads in both asset classes
    6 Dec 2012, 10:14 AM Reply Like
  • I agree with rhgordon3505 comment above, adding only that for those who invest with high-yield bond funds, stay calm and stay long term, but also scrutinize each of the fund's holdings regarding percentages of bonds having grades below BB. I would be a bit uneasy about bond portfolios going for big gains due to hoped for upgrades of the lowest rated junkies in this environment.
    6 Dec 2012, 11:22 AM Reply Like
  • the upside isn't the coupon, because the high coupons are on bonds that have a pull to par effect. total return is very constrained.
    6 Dec 2012, 11:57 AM Reply Like
  • how can you have a "pull to par" effect from an asset class (HY bonds) that already trades near at it a new all-time mark in terms of low average coupon. i cant think of one meaningful HY bond index that is used as a benchmark by institutional investors where the average price isnt already above par.

     

    no one should invest in this asset class on in leveraged loans through funds or ETFs expecting a "pull to par" when they arent ACTIVELY managed. these days "pull to par" really requires thorough, single-name analysis of below-par bonds and loand and the identification of possible catalysts (fundamental or strucutural) which, over time, should result in value creation.
    6 Dec 2012, 03:43 PM Reply Like
  • Problem is, LABAX, the bond fund shilled in the Loomis piece is a dog with a ONE STAR rating from Standard and Poors.

     

    A monkey could have done a better job (and cheaper) throwing darts at a bond chart posted on a wall.
    6 Dec 2012, 09:22 PM Reply Like
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