Last week we heard the results of the latest Fed meeting. To little surprise, they continued with the “tapering” of $10 billion a month. However, the clarity Yellen offered as to likely finishing up the latest round of quantitative easing by the fall of this year and then start looking to raise rates about 6 months after that, seemed to catch everyone momentarily off guard.1
All of a sudden the market is worried that rates may be going up a few months earlier than had previously been expected. In a knee jerk reaction, we saw Treasury yields spike and equities take a hit. Yet on the flip side, the Fed did revise language that tied rate rising to a 6.5% jobless rate target, abandoning this link and giving them a bit more flexibility in waiting to increase rates, as the current jobless rate now nears that 6.5% level.1
So what does this mean for us as high yield investors? Very little. In the scheme of things, what does it really matter if the fed funds rate starts rising in mid-2015 versus late-2015/early-2016? From our perspective, do those few months at all change our investment strategy? No.
Our investment objective will remain focused on generating what we view as high current income, with the potential for capital gains, over the long term. Yes we do consider the interest rate environment and outlook, but at the end of the day, our focus is on yield and value as we make our investment decisions. Furthermore, as we have profiled before, high yield bonds have historically had a negative correlation to Treasury rates2, and have actually performed well during periods of rising rates3 (see our piece “Strategies for Investing in a Rising Rate Environment”).
The other thing to consider is that markets are forward looking. The reality is that if rates are expected to increase, the markets will react well ahead of that. For instance, last summer when the first rumblings of the “tapering” happened, the markets swiftly reacted and Treasury rates saw a significant move in the latter half of the year. And as we entered 2014, the consensus was certainly that rates would be rising, but so far, even with last week’s move, rates are below where we ended 2013.