However, the price of credit is still ultimately dictated by supply and demand. While U.S. equities have seen strong inflows so far in 2014, high-yield bond strategies have seen net outflows of nearly $14 billion.4 Even though investors remain bullish on the U.S. economy, they are choosing to express this view via equities as opposed to fixed income. As a consequence, equity markets are outpacing the recovery in high-yield debt, resulting in a divergence.
Expressing a Bullish View of Credit
While we continue to believe that high yield can continue to perform well from a credit perspective, concerns about rising interest rates may be dampening investor enthusiasm and flows. In our view, an interesting alternative would be to own high-yield bonds but then hedge the interest rate risk of the portfolio. In this approach, investors are able to isolate their exposure to credit risk while reducing their exposure to movements in interest rates.
1Sources: WisdomTree, Bloomberg, as of 5/31/14.
2Figlewski, Stephen, Halina Frydman, Weijian Liang (2010), “Modeling the Effect of Macroeconomic Factors on Corporate Default and Credit Rating Transitions,” Credit Suisse.
3Source: Moody’s Investor Service, as of 10/31/14.
4Source: EPFR Global, as of 11/7/14.