The use of the term duration has successfully been adopted by the high yield investment universe over the past few of years. Why? Because all else being equal, lower duration means lower interest-rate risk. And the number-one concern for fixed income investors over the past several years has been a fear of when interest rates will begin their rise to normal levels. In fixed income, if rates rise, the value of your bonds declines. And the longer your duration, the more pronounced your decline, again with the caveat all else being equal. The common way to explain duration is that it measures the sensitivity of the price of a bond to a change in interest rates and is expressed as a number of years. This is an extremely useful way to compare two fixed income investments where all else is equal. We have noticed that in a reach for yield, investors have invested in short duration high yield as a way to both gain the higher yield available in the high yield market while seemingly reducing risk by having a shorter duration portfolio. Read more
Posts tagged ‘high yield’
Credit research is tough enough without trying to do it with one arm tied behind your back. Back in the day, credit analysts would diligently put together massive spreadsheets with all kinds of metrics that explained all aspects of a company’s financial performance and credit strength. These days, however, you have quant geeks trying to boil everything down to one number that “explains it all” so that picking relative value is somehow “easier.” The most common relative-value graph produced by the Street these days is a plot of leverage versus yields. Well, in our view, easy isn’t the best in the world of high yield credit. We’ve seen numerous “credit pickers” out there focused entirely on leverage, who have totally forgotten the rest of the important credit metrics, particularly, coverage. Read more
Yesterday, my colleague, Phelps Hoyt, gave some insight into how industry conferences play into the work of credit analysts at Principal Global Fixed Income. I want to expand a little on their role in our research process and the objectives I pursue when I’m able to attend an investor conference.
While many conferences are held at interesting or beautiful locations, last week, the desert oasis surrounding my hotel provided little more than a change of setting for my morning run. The busy schedule of each day had me going from breakfast at 7:30 a.m. until wrap-up of the evening reception at 10:00 p.m. I came to the conference with several objectives. First, meet with management teams in order to assess the outlook of their business. Second, build deeper relationships with contacts and management of these companies. Lastly, regain perspective that an ever-volatile market can suppress over time. Here’s how things went… Read more
Last week, I was fortunate enough to attend one of the most-respected high yield and leveraged finance conferences in the world; an event that remains the world’s largest and longest-running leveraged finance conference. Every year, the conference aims is to gather the most important issuers, investors and sponsors to discuss the themes that will shape the business in the year ahead. And while the planners designed an agenda with plenty of informative keynote sessions, I found that the most instructive and valuable sessions were the interactive panel discussions and one-on-one meetings.
As an example, on the evening before the conference officially kicked off, a group of investors had the opportunity to sit down with the finance executives of one of the largest high yield telecom issuers and learn first-hand of their business plans and how those will influence the company’s leverage and free cash flows. It was a great opportunity to get a direct view of all the information analysts and investors have had access to through conference calls and SEC reports, but in a clear and simple manner. Read more
In a perfect world, a diversified portfolio would have asset classes that are uncorrelated, allowing an investor to maximize return while minimizing risk. As every high yield portfolio manager has probably told you, high yield bonds have had low correlations with other asset classes, and they can offer attractive risk-adjusted returns. This low level of correlation has allowed investors to benefit from allocating to high yield bonds. According to Barclays, monthly high yield bond-return correlations have been negative versus U.S. Treasurys over the past twenty years. Obviously, that correlation statistic includes a time period of declining Treasury rates.
So what have correlations done during the most recent increase in rates?
Despite what feels like a 1.00 (perfectly positive) correlation to rates, high yield bond daily-return correlations to the Barclays U.S. Treasury 5-7 Year Index since May 1 are elevated, but still remain relatively low, only 0.20 (unless otherwise noted, all performance information is as of August 27, 2013). Read more
Among the many perils facing today’s workers and retirees, four in particular stand out: longevity risk, inflation, market volatility, and abandonment risk. I wrote a post on this topic in June.
In this post, I’ll take a closer look at longevity risk — one of the most common retirement concerns. In fact, the risk of outliving their savings is a worry that keeps about one-third of workers and retirees awake at night, according to the Principal Financial Well-Being IndexSM (third quarter 2011).
Welcome to the new Fixed Income segment of The Principal Blog! The video below gives a quick look at what to expect.