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| 5/10/2013Market Performance |
| Municipal Bonds |
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S&P National Bond Index
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3.00% |
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S&P California Bond Index
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2.96% |
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S&P New York Bond Index
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3.13% |
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S&P National 0-5 Year Municipal Bond Index
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0.70% |
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| S&P/BGCantor US Treasury Bond |
400.09 |
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| Income Equities: |
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| Preferred Stocks |
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S&P U.S. Preferred Stock Index
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848.03 |
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S&P U.S. Preferred Stock Index (CAD)
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636.26 |
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S&P U.S. Preferred Stock Index (TR)
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1,701.05 |
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S&P U.S. Preferred Stock Index (TR) (CAD)
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1,276.26 |
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| REITs |
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S&P REIT Index
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174.07 |
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S&P REIT Index (TR)
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425.30 |
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| MLPs |
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S&P MLP Index
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2,469.58 |
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S&P MLP Index (TR)
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5,428.50 |
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See Data
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PIMCO Favours High Yield and EM Corporate Bonds |
PERSPECTIVES: For investors seeking high income, PIMCO believes the high yield space offers "safe spread" opportunities
From time to time, Morningstar publishes articles from third party contributors under our "Perspectives" banner. Here, Andrew Jessop, Executive Vice President and High Yield Portfolio Manager at PIMCO, comments on the high yield market performance and takes a look at why so many investors remain committed to an asset class that is typically associated with credit and liquidity risk. This article first appeared on www.pimco.com. If you are interested in Morningstar featuring your content, please provide your details and/or submit your article here.
The high yield market performed exceptionally well both last year and in 2009, recovering from the credit crisis that besieged the market in 2008 (the BofA Merrill Lynch U.S. High Yield Master II Index returned 57.5% in 2009 and 15.2% in 2010). But the situation has changed significantly since then, with yields falling to roughly 7% and prices pushing north of par. So, why do so many investors remain committed to this asset class, despite the typical risks associated with high yield bonds such as credit and liquidity risk?
Spreads Remain Attractive
The average spread on high yield bonds versus comparable Treasuries was roughly 500 basis points in March, which is slightly above the historical average and relatively wide versus the tighter levels seen in 2007 (closer to 250 basis points). For this reason, we think spread-sensitive products such as high yield and emerging market corporate bonds offer investors what we call “safe spread” opportunities, which PIMCO defines as the sectors that are most likely to withstand the vicissitudes of a wide range of possible economic scenarios.
In a world where duration can no longer serve as the anchor for portfolio construction, we believe high yield offers opportunity in part because this asset class typically has a relatively low correlation with other asset classes, particularly those with more interest rate sensitivity such as the Treasury market.
Also supportive of the high yield market today is the fact that investors still demand higher income in a low interest rate environment. Strong investor appetite for high yield bonds has continued. But, importantly, the bank loan market has also experienced a significant pick-up in demand. This is allowing a wider spectrum of speculative grade companies to access the capital markets, refinance their debt on favourable terms and not rely solely on the high yield bond market to improve their liquidity profiles. As the cost of borrowing comes down, additional cash flow is freed up and balance sheets are strengthened even further.
Default Rates Fall, Recovery Rates Rise
Since 2009, there has been nearly half a trillion dollars of high yield bonds issued, which represents almost 40% of the total outstanding global high yield market. For this very reason, most high yield companies do not face imminent liquidity requirements and, as a consequence, we have seen the default rate drop from an almost cyclical high to a cyclical low in the span of less than 18 months. Last year, the default rate on an issuer basis was approximately 2.4%, but is currently running at a rate of closer to 1.5%. If we look at it on a dollar-weighted or par-weighted basis, that default rate was less than 1% at the end of March.
At the same time, when a company does default, investors are not losing as much money as they would have lost two years ago. The average recovery rate on high yield bonds is close to a cyclical high of around 60 cents on the dollar, in contrast to the 20% recoveries in the first half of 2009. We expect the default rate to remain in the 1% to 2% range for at least the next 12 to 18 months, which would mean default losses of 1% or less.
For the complete article.
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| Stuff to look at |
Yield and Income Newsletter: A must have for income investors. subscribe NOW
S&P Commentary and Newsletters: S&P
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| BondsOnline Advisor |
Income Security Recommendation January 2013 Issue.
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