Amid changes in the landscape and some elevated volatility, advisors, and investors desiring quality with junk bonds have a compelling option with 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.
Amid declining issuance and a sagging domestic economy, HYGV is worth considering.
“March 2020’s high-yield bond issuance collapsed by 74% from a year earlier to merely $4 billion in response to a lift-off by Bloomberg/Barclays speculative-grade bond yield and spread from their January-February 2020 averages of 5.28% and 360 basis points, respectively, to March 23’s paralyzing highs of 11.69% and 1,100 bp,” said Moody’s in a recent note. “Despite how April and May will be home to some of the worst reports ever on U.S. business activity and notwithstanding downwardly revised assessments of corporate credit quality, the spec-grade bond yield and spread subsequently plunged to June 3’s 6.27% and 562 bp.”
HYGV: Right for These Times
The current market environment is also more supportive of the bond markets. The Federal Reserve is throwing everything, even the kitchen sink, in the economy. The central bank has enacted near-zero rates and unlimited bond purchases, including investment-grade and speculative-grade corporate debt for the first time, to support credit markets.
HYGV focuses on value by pursuing the higher risk/return potential found by concentrating on a targeted credit beta; utilizes Northern Trust Credit Scoring methodology to eliminate bottom 10% of issuers; performs liquidity assessment based on issuer’s debt outstanding, age and remaining time to maturity with the purpose of eliminating the bottom 5% illiquid securities; and intends to match the duration of a market cap-weighted index (ICE BofAML US High Yield Index), while maintaining sector neutrality.
“Thinner spreads, lower yields, and an equity rally prompted an April and May resurgence of high-yield bond offerings that often boosted liquidity and/or refinance outstanding debt. After growing by 25% year-to-year in April, the annual increase for May’s gross issuance of US$-denominated high-yield corporate bonds accelerated to 40%,” notes Moody’s.
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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.