High-yield corporate bonds set a blistering pace in July, but with August here, investors may want to take a more conservative approach to the asset class with the FlexShares High Yield Value-Scored Bond Index Fund (NYSEArca: HYGV).
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.
“The junk-bond market just posted its best month since 2011, even as companies miss debt payments at the quickest pace since the financial crisis,” reports Alexandra Scaggs for Barron’s. “The high-yield bond market returned 4.8% in July, its best monthly performance since the 6% monthly return in October 2011.”
A Good Time for HYGV
Specifically, high-yield bonds, like their names suggest, provide opportunities for enhanced yields. Since 1994, the high yield bond market has exhibited an average spread of 509 basis points above Treasuries. That’s particularly relevant today when U.S. interest rates reside near zero.
“July brought an even rarer occurrence, according to Marty Fridson, publisher of the Income Securities Investor newsletter: Falling benchmark Treasury yields were accompanied by a drop in the high-yield market’s risk premium. In other words, not only did Treasury yields fall as that market rallied, but yields on junk bonds fell further, reports Barron’s. “It has been more than a decade since the spread between yields on high-yield bonds and Treasuries narrowed this much—about 1.3 percentage points—while five-year Treasury yields were falling, Fridson says. The last time it happened was July 2009, in the aftermath of the financial-crisis low in stock markets.”
HYGV seeks investment results that correspond generally to the price and yield performance of the Northern Trust High Yield Value-Scored US Corporate Bond Index (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.
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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.