- Certain asset classes, such as investment grade bonds have high correlation to Treasuries. That means if rates (yields) increase in Treasury bonds, and prices decline, we would theoretically see the same sort of action in investment grade bonds, price declines.
- However, high yield bonds are slightly negatively correlated to Treasuries, so we would expect to theoretically see minimal impact from a move in Treasuries, or even an increase in high yield bond prices.
The price of high yield bonds have historically been much more linked to credit quality than to interest rates.
- Historically rates rise during a strengthening economy, and a stronger economy is generally favorable for corporate credit, as profitability and credit fundamentals often improve.
We actually look forward to a rate increase because that at least removes the uncertainty overhanging the market…and maybe the media can move on to talking about something else. In the scheme of things, we believe that the timing of a rate move is largely irrelevant for high yield investors. The high yield market is offering investors what we believe to be attractive long-term value and tangible yield, which we see as both relevant and necessary for investors no matter where rates go.
1 Barclays Capital U.S. High Yield Index covers the universe of fixed rate, non-investment grade debt. U.S. 5 Year Treasury Note is the on-the-run Treasury (source Bloomberg). Barclays Corporate Investment Grade Index consists of publicly issued U.S. corporate and specified foreign debentures and secured notes that meet the specified maturity, liquidity, and the quality requirements. Barclays Municipal Bond Index covers the long-term, tax-exempt bond market. Data as of 11/6/15 for the various Barclays indexes, source Barclays Capital, and 11/9/15 for the U.S. 5 Year Treasury Note. Yield to Worst is the lowest, or worst, yield of the yield to various call dates or maturity date. Duration is the change of a fixed income security that will result from a 1% change in interest rate. The duration is a modified adjusted duration for the various Barclays indexes and Bloomberg calculated duration to workout for 5-Year Treasury.
2 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. A153.