by Todd Youngberg, CFA, Senior Vice President, Head of High Yield.
The global high yield bond and U.S. bank loan markets posted record-high returns for the year 2009. While another such year is not in the cards mathematically in 2010, we believe attractive returns can be realized with the improving fundamental backdrop of declining default rates and spreads that are wider than the historical average.
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January 29, 2010
The U.S. should benefit heavily from fiscal stimulus and inventory rebuilding in the first half of 2010, resulting in a short-lived V-shaped recovery. We expect slower growth in the second half, however, as the impact of fiscal stimulus fades and small businesses and households suffer from lack of credit availability. The Canadian economic recovery is likely to be stronger than the U.S. recovery, supported by healthier housing and labor markets and strong resource prices.
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The convertible market performed very well in the fourth quarter, delivering a 6% return. This ongoing trend upward was driven by increasing risk appetites, underlying stock prices, tightening credit spreads and associated inflows to the strategy. Considering an uncertain recovery trajectory, we remain somewhat defensive in our approach to portfolio construction. We generally favor hard assets, healthcare and energy services and will remain underweight to financials, consumer discretionary and industrials. Any increasing volatility in the market – along with attractive secondary pricing – will make this category appealing in 2010.
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The U.S. should benefit heavily from fiscal stimulus and inventory rebuilding in the first half of 2010, resulting in a short-lived V-shaped recovery. We expect slower growth in the second half, however, as the impact of fiscal stimulus fades and small businesses and households continue to suffer from a lack of credit availability. While fixed income credit spreads have tightened substantially from record wide levels, they remain attractive relative to long-term averages. We continue to see opportunities to profit from tighter spreads in credit and securitized markets.
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The Barclays Capital Global High Yield Constrained Index turned in its fourth consecutive quarter of positive returns, at 6% for the fourth quarter of 2009, ending the year at 62.33% and easily offsetting 2008’s worst-year record of -38.4%. Going into 2010, we expect that declining default rates, tightening spreads, ample money supply, a strong primary market and the risk of rising interest rates will position the high yield asset class attractively against other classes. We recommend a moderate overweight to high yield with a focus on BB and B rated bonds and credit selection.
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The Barclays U.S. Credit Index delivered 267 basis points of excess return for the quarter on 41 bps of spread tightening. The energy and finance sectors were the best-performing sectors. The worst performers for the quarter were higher quality non-corporates, including supranationals and foreign local governments. For 2010, we recommend a moderate overweight to investment grade corporate bonds, and we expect spread tightening to continue due to improved fundamental conditions, supportive technical factors and attractive valuations.
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According to Aviva Investors data, new issue volume for traditional private fixed income in the fourth quarter of 2009 was approximately $8 billion. This was a sizeable increase from the $6 billion issuance level in the third quarter. Private debt issuance is expected to be strong in the first half of 2010, as well. Investors should continue to see attractive terms and strong covenants.
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Weekly Capital Markets for March 8, 2010
Last week’s economic data was better than expected, leading to an increase in Treasury yields and equity prices.
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Weekly Capital Markets for March 1, 2010
Global equity markets moved lower as growing concern over the strength of the economic recovery enticed investors to the safety of Treasuries.
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Unprecedented global monetary and fiscal stimulus actions have helped pull the North American economy out of the deep recession and have systematically stabilized the financial markets.
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Commercial real estate fundamentals are likely to remain for several years before any significant rebound. Increasing vacancies, decreasing effective rents and increasing capitalization rates will put downward pressure on valuations through the first half of 2010. Despite the continued downward pressure, there are opportunities to employ commercial real estate capital even in this very difficult environment.
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Distressed investing was one of the top performing strategies, at +2.01% (HFRI Distressed Index).
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December brings to a close the best-performing year of the decade, with most broad hedge fund industry measures showing performance of 20% or more.
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