With companies looking to capitalize on the Federal Reserve backstop and low interest rates, issuance of high-yield corporate debt is soaring this month, but all that new supply doesn’t mean an increase quality. Investors looking for that ought to consider the FlexShares High Yield Value-Scored Bond Index Fund (NYSEArca: HYGV).
HYGV seeks investment results that correspond generally to the price and yield performance of the Northern Trust High Yield Value-Scored US Corporate Bond IndexSM (the underlying index). The fund generally will invest at least 80% of its total assets (exclusive of collateral held from securities lending) in the securities of its underlying index. The underlying index reflects the performance of a broad universe of U.S.-dollar denominated high yield corporate bonds that seek a higher yield than the overall high yield corporate bond market, as represented by the Northern Trust High Yield US Corporate Bond Index.
“Issuance in the U.S. high-yield bond market is tracking at its busiest pace for any June on record, with $23.875 billion priced through June 12,” reports S&P Global Market Intelligence. “The impressive figure follows a strong lead-in from May, which wrapped with a record-setting total for that month, and the third-highest issuance ever for April. Year-to-date volume was $176.8 billion at the close on June 12, up 56% year-over-year.”
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.
“High-yield issuers have been drawn in by improved borrowing conditions as yields and spreads retreated from eye-popping levels observed at the start of the coronavirus-related market volatility, in March,” notes S&P Global Market Intelligence. “Per the S&P U.S. High Yield Corporate Bond Index, the average yield to worst ebbed below 7% late last month, and reached a three-month low of 5.90% on Monday, June 8, down from double-digit figures in early March.”
The current market environment is also more supportive of the bond markets. The Federal Reserve is throwing everything, even the kitchen sink, in the economy. The central bank has enacted near-zero rates and unlimited bond purchases, including investment-grade and speculative-grade corporate debt for the first time, to support credit markets.
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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.