Rieger Report®: October 2019 Taking a Stand on High Yield

U.S. High Yield Corporate Bonds & Senior Loans

There is no one black and white way to look at fixed income asset classes. Each of us has different investment time horizons, objectives and risk profiles. When reporting out on bond market segments I like to think of three distinct horizons: tactical use, short term exposure and long term/buy & hold exposure.

My views of the current state:

  • U.S. High Yield Corporate Bonds: The SPDR Bloomberg Barclays High Yield ETF (JNK) has shown an 11.7% YTD return. This asset class has a high correlation to equities. Use of this asset class tactically as equity market volatility ripples through to the credit markets still makes sense to me…but only tactically. The easiest tactical use is via Exchange Traded Funds (ETFs) and the larger ones like JNK and HYG tend to have good depth of market. Caution should be exercised if intending to own this asset class for 1 – 2 years as potential recession and default risk could be elevated during that period.   I don’t see any reason at this time to initiate a long term buy and hold position. Why be in in an asset class that is going to act more like equities? Simply put, no spread.
  • Senior Loans: Not for me. Just not interested in the elevated risk this asset class poses. Prolonged low rates, weak covenants (investor protections) and an untested default cycle regarding recovery rates are high on my concern list.

U.S. High Yield Corporate Bonds (Junk Bonds)


Tactical: I need to be nimble.

I view junk bonds and in particular junk bond ETFs as tactical tools while remaining alert for opportunities created by volatility in the very near term. Rates appear to be held low for longer, demand for yield remains strong and geopolitical risk may keep the USD in a narrow trading range.

Short Term 1 -2 year Horizon: Elevated Concern.

I don’t like the risk return dynamic of fixed rate junk bonds v. equities over this time horizon. Not enough incremental yield to offset the risk of a coming bear market and/or recession. Resulting defaults could manifest themselves during this period. Liquidity can change dramatically. I view this asset class with elevated concern for this horizon.

Long Term Horizon: Not for me.

At the current tight spreads to investment grade there is little to like here in my opinion. Perhaps it deserves another look when and if spreads widen creating a window to enter this market.

U.S. Senior Loans (Leveraged Loans, Bank Loans)


Tactical: Not interested.

With the Fed holding rates low or perhaps slowing the rise of rates this asset class of floating rate syndicated bank loans has lost their appeal. I view the returns year-to-date as an opportunity to exit with a profit. If using this asset class tactically, I would prefer to use one of the larger loan ETFs to ensure liquidity (exiting when I want) such as the SPDR SRLN ETF or the Invesco BKLN ETF.

Short Term 1 -2 year Horizon: Won’t touch it.

Rates may begin to rise in this time frame. However, a recession could put credit stresses on these entities and defaults may rise. If defaults rise, the trend of the last 5 years or so of issuing loans with weak protections (Covenant Lite) for loan holders (investors) will test historical recovery rates.

Long Term Horizon: Not my money.

At this time, entering the senior loan market via a mutual fund or an ETF with the intent of meeting a long term investment goal is not appealing. In a similar way to fixed rate junk bonds, I would reconsider this view if and when yields are incrementally higher and when the market experiences some defaults testing recovery rates v. the Covenant Lite deals.

Analyst Disclosure

  • JR Rieger and or the Rieger Report LLC has not received compensation either directly or indirectly from the sponsor(s) of the ETF(s) included in this report.
  • At the time of this writing, JR Rieger does not own the ETF(s) cited or referred to in this report.

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