There are still more than four months remaining in 2020, but junk bond issuance already toppled previous records and with that spate of new issues, quality is all the more meaningful. That theme could benefit the FlexShares High Yield Value-Scored Bond Index Fund (NYSEArca: HYGV).
“U.S. corporate investment-grade issuance reached a record $1.342 trillion Monday, surpassing 2017’s full-year total in less than eight months amid seemingly endless investor appetite following the Federal Reserve’s unprecedented steps to bolster liquidity,” reports Skyler Rossi for Bloomberg.
HYGV focuses on value by pursuing the higher risk/return potential found by concentrating on a targeted credit beta; utilizes Northern Trust Credit Scoring methodology to eliminate bottom 10% of issuers; performs liquidity assessment based on issuer’s debt outstanding, age and remaining time to maturity with the purpose of eliminating the bottom 5% illiquid securities; and intends to match the duration of a market cap-weighted index (ICE BofAML US High Yield Index), while maintaining sector neutrality.
Fed Assistance
The Federal Reserve wasn’t done with bond purchasing after it stepped in to shore up the fixed income market following the height of the Covid-19 equities sell-offs. It opted for more high yield purchased during the month of July in addition to other equities purchases.
“Still, the barrage of issuance is starting to take its toll on returns, with high-grade bonds in the midst of their worst month since March. They lost 1.58% last week and are down 1.2% so far this month, on track for the first decline since the pandemic took hold and upended markets earlier this year,” according to Bloomberg.
That could be a sign that amid a flood of new bonds coming to market, investors should capitalize in HYGV’s quality purview.
HYGV’s index reflects the performance of a broad universe of U.S.-dollar denominated high yield corporate bonds that seeks a higher total return than the overall high yield corporate bond market, as represented by the Northern Trust High Yield US Corporate Bond IndexSM. The fund generally will invest under normal circumstances at least 80% of its total assets (exclusive of collateral held from securities lending) in the securities of its index.
The FlexShares fund is strutting its stuff. While the broader junk bond universe is struggling over the past month, HYGV is higher by almost 2%.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.