So since last June, the month during which we saw the recent lows in spread levels, we have seen the percentage of the index at a discount to par move from a mere 11.5% to over 37% and the percentage of the index at a yield-to-worst level of 7.5% or higher move from about 11% to just under 30%. This means that today, there are over 830 individual bond issues that are priced sub $100 and nearly 700 individual issues that trade at a YTW of 7.5% or higher within the Barclays High Yield Index. So as we look at the landscape, there are plenty of names to evaluate and opportunities offering what we see as attractive yield and capital gains potentials. Furthermore, we see this opportunity as even more attractive given the expectations for a benign default environment to continue, excluding certain sectors of the energy space.3
While 2014 was characterized largely by the lack of volatility for most the year, and active management suffered as a result, we see those tables turning in 2015 as we expect this volatility to continue. As we sit today, we see an attractive entry point into the high yield market for active managers who can parse through the space to determine where there is value to be had, and where there are value-traps.
1 Acciavatti, Peter, Tony Linares, Nelson Jantzen, CFA, Rahul Sharma, and Chuanxin Li. “Credit Strategy Weekly Update,” J.P. Morgan North American High Yield Research, June 26, 2014, p. 33 and January 29, 2014, p. 33, as represented by the JPMorgan High Yield Bond Index, which consists of fixed income securities with a maximum credit rating of BB+ or Ba1. Referenced spread is “spread to worst” and referenced yield is “yield to worst.” The yield to worst is the lowest potential yield that can be received on a bond, without the issuer actually defaulting, and includes the various prepayment options such as call or sinking fund. The spread is the spread to worst based on the yield to worst less the yield on Treasuries.
2 Based on our analysis of the Barclays Capital High Yield index constituents as of the indicated dates. Barclays Capital US High Yield Index. Formerly the Lehman Brothers US High Yield Index, this is an unmanaged index considered representative of the universe of US fixed rate, non-investment grade debt.
3 Acciavatti, Peter D., Tony Linares, Nelson Jantzen, CFA, Rahul Sharma, and Chuanxin Li. “2014 High-Yield Annual Review.” J.P. Morgan, North American High Yield and Leveraged Loan Research. December 29, 2014, p. 14. See data in our piece “The Year Ahead: High Yield, Energy, and Interest Rates.”
This article was written by Heather Rupp, CFA, Director of Research for Peritus Asset Management, the sub-advisory firm of the AdvisorShares Peritus High Yield ETF (HYLD).