HYG And U.S. High-Yield Market Outlook: Week Ending March 08, 2019

About: iShares iBoxx $ High Yield Corporate Bond ETF (HYG)
by: Lighthouse Research

HYG price decreased by 0.6% due to lack of positive catalysts and weak US jobs data.

US Treasury yields shifted downward last week and UST 10Y yield achieved three-month low.

All the sectors demonstrated poor performance, especially Energy and Consumer sectors.

Vladimir Nikulin, CFA

During the last week, the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) lost 0.60% (60 bps). It is the first HYG negative weekly return since the end of January. HYG's price change was negative every day during last week. Such HYG dynamics are consistent with performance of other asset classes. The main explanation is lack of new positive catalysts during last week. Investors get used to continuously positive information as they were encouraged by Fed dovish commentaries and Trump’s positive comments regarding US-China trade deal. Moreover, there was published weak US jobs data on Friday.

Figure 1. HYG ETF price dynamics during the week ending March 8

Source: Bloomberg Terminal

US Treasury yields shifted downward last week following weak US jobs report and concerns regarding global economy slowdown. US Treasury 1OY yield achieved three-month low at 2.63% at the end of last week.

US macro data was contradictory as February US jobs data significantly missed consensus, but other data was quite strong. Only 20,000 jobs were added compared to more than 300,000 in January and 180,000 forecast in February. It was the weakest growth for 17 months. But wages increased by more than 3%, the most growth since 2009. The weak US jobs data contradicts other indicators such as “Beige Book” data, the ADP private payroll report, ISM employment indices. For example, ISM non-manufacturing index indicates expansion and exceeded economists’ forecast. We should wait for further US jobs data in order to determine whether it is one-off or a sustainable trend.

Figure 2. Change in US Treasury Active Contracts Curve for the last week

Source: Bloomberg Terminal

The underlying HYG portfolio price decreased by 59 bps, while price declined by 60 bps as premium growth offset negative effect from other discrepancies.

Figure 3. Contribution of sectors to changes in HYG over the week

Source: Bloomberg Terminal

All the sectors closed the week posting negative price returns. The worst-performing sectors were the Consumer and Energy sectors. It is interesting that consumer non-cyclical sector performed worse than Consumer, Cyclical despite the overall moderate risk-off. While Utilities was the best-performing sector that lost only 22 bps last week. Utilities sector has demonstrated the highest price return on a monthly basis. However, it has comparatively small effect on HYG price as the main “drivers” of HYG performance are Communications, Energy and Consumer sectors that represent 70% market weight in HYG structure.

Energy sector declined by 0.80% primarily due to poor bond performance of some issuers that have high weight in the energy sector.

Consumer, Non-Cyclical sector lost 0.77% last week. The most healthcare and medical companies (represent 30% of Consumer, Non-Cyclical sector or 6% of HYG portfolio) demonstrated negative dynamics last week.

Figure 4. HYG sectors weekly price changes

Source: Bloomberg Terminal

Consumer, Non-Cyclical sector has one of the highest leverage ratios among sectors included in HYG due to large concentration of distressed medical and healthcare companies. The energy sector is also highly leveraged due to large companies' CAPEX when oil price was significantly higher. To conclude, sectors that include highly leveraged companies suffer most during risk off and fears of US economy slowdown. Consumer Non-Cyclical and Energy were among the worst performer last month. The poor performance of Energy and Consumer sectors during last week made a significant contribution to monthly figures.

Figure 5. HYG sectors leverage ratio

Source: Bloomberg Terminal

Investors will follow any news regarding the US economy and US-China trade talks. These two issues will determine the HYG performance in the near future. We remain neutral on HYG given unclear US economy perspectives and moderate spreads.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.