Tim Leary, Senior Portfolio Manager on the BlueBay U.S. Fixed Income team, discusses that despite recent market volatility, US High Yield bonds offer attractive yields with lower duration risk compared to Investment Grade corporates, providing the potential for a stable income-generating option for investors amidst economic data releases uncertainty.
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Hello & welcome back to The Weekly Fix. My name is Tim Leary & I’m a Senior Portfolio Manager on RBC’s BlueBay Leveraged Finance Team in Stamford, Connecticut.
As we sit here today, the option adjusted spread, or OAS on the US HY index sits at 307 over with a duration of just over 3yrs. That may seem tight, but it’s actually 14 wider on the year despite the 7% index return. Compare that to US Investment grade corporates which has an equivalent spread of just 83bps over & a duration of 6.4 yrs. That HY to IG spread relationship is 47 or so basis points wider today than the tights we saw in January. Said another way, no US HY spreads aren’t too tight. In yield to worst terms, investors in corporate bonds can pick up 2.1% more yield for less than half the duration, or interest rate risk, by investing in US High Yield. We live & breathe these seemingly miniscule moves in spread every day on the desk, but the reality is, corporate bonds are doing what they are supposed to do for investors and that’s generate income each month. We believe investors should expect time in the market as opposed to timing the market to win the day & if you find yourself unsure of the Yo-Yo that is Mag 7 over the last month, we believe corporate bonds could provide a steady port in the storm.
The US government has reopened, and we’ll see a wave of pent-up economic data over coming weeks that will likely increase volatility in the rate space. September jobs data, yes, September, should be released November 20th but we won’t see November & December data until after the Fed decision on December 10th. Luckily, well rated HY bonds keep doing their thing by generating interest income for end clients with less vol and less noise, which seems like a decent place to be as we enter the Thanksgiving and December holiday season.
As always, thanks for your time & good luck trading.
Key points
The US High Yield (HY) index currently has an Option Adjusted Spread (OAS) of 307 basis points (bps) with a duration of just over 3 years, which is 14 bps wider than at the start of the year.
Compared to US Investment Grade (IG) corporates, with a spread of 83 bps and a duration of 6.4 years, HY have been providing better income generation with lower interest rate risk.
With the US government reopening and upcoming economic releases likely to increase rate volatility, well-rated HY bonds generate steady interest income, offering the potential for a stable option.