* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Download What Might Investors Expect from US High Yield?
Systemic risk wikipedia , lookup
Private equity in the 1980s wikipedia , lookup
Private equity in the 2000s wikipedia , lookup
Stock trader wikipedia , lookup
Leveraged buyout wikipedia , lookup
Environmental, social and corporate governance wikipedia , lookup
Short (finance) wikipedia , lookup
Interbank lending market wikipedia , lookup
Mark-to-market accounting wikipedia , lookup
History of investment banking in the United States wikipedia , lookup
Investment management wikipedia , lookup
Investment banking wikipedia , lookup
Yield curve wikipedia , lookup
Securities fraud wikipedia , lookup
Fixed-income attribution wikipedia , lookup
Security (finance) wikipedia , lookup
Auction rate security wikipedia , lookup
FIXED-INCOMEINSIGHTS WhatMightInvestorsExpectfromU.S.HighYield? March16,2017 ZaneE.Brown Partner,FixedIncomeStrategist 852Views Here,weweighanumberoffactorsthatmayaffecttheperformanceofthe high-yieldmarketinthemonthstocome. InBrief Af terastrongshowingin2016,U.S.high-yieldsecuritieshadasolidstartto2017.Butwhat maylieaheadf ortheassetclass? Itdoesnotseemlikelythatreturnsf orthehighyieldwillcontinueatthesametrajectory. Nonetheless,therearesomepositivef actorsf ortheassetclass. First,aJ.P.Morganmeasureof def aultriskwasrecentlyatbelow-averagelevels.Also,tax andf iscalpolicyinitiativesmayhelpspurf asterU.S.economicgrowth. Finally,ananalysisof pastperiodsof risinginterestratesshowsthathighyieldandother credit-sensitiveassetclassesoutperf ormedhigher-qualitysegmentsof thef ixed-income market. Thekeytakeaway—Withinthecontextofthefactorsmentionedabove,concernsabout potentialovervaluationofthehigh-yieldmarketappeartobeoverstated. Af terastellarshowingin2016,U.S.high-yieldsecuritieshavecontinuedtoperf ormwellthrough earlyMarch2017.YieldspreadsrelativetoU.S.Treasurysecuritieshavemovedbelowlong-term averages,raisingconcernsof potentialovervaluationinthehigh-yieldsectorand,f orsome investors,f earof areversiontothemeanandtheassociatedpotentialpricedeclines. Whatmaylieaheadf ortheassetclass?Prospectsf orf urtherratehikes(af tertheoneannounced onMarch15)bytheU.S.FederalReserve(Fed),pro-growthf iscalinitiatives,andhigherinf lation appearpoisedtoinf luencethehigh-yieldsectoroverthenext12–24months.Anexaminationof currentf actorsaf f ectinghighyield,andananalysisof perf ormanceduringsimilarhistorical periods,shouldhelpinvestorscraf tanappropriatestrategyf ortheperiodahead. ManagingExpectations TheJ.P.MorganHighYieldIndex,awidelyf ollowedsectorbenchmark,returned18.9%in2016, helpedbyexposuretotheriskiestandbestperf orming‘CCC’ratedcredits,whichreturned 34.7%.1Forthef irsttwomonthsof 2017,theindexreturnedarelativelyattractive2.7%,with ‘CCC’issuesagainbestinghigher-qualitycreditswithareturnof 5.2%. 1 Continuationof thisreturntrajectoryisunlikely,eventhoughreturnsshouldbef avorablerelativeto otherf ixed-incomealternatives.Theindexbegan2016withayieldof 9.28%andaspreadover U.S.Treasurysecuritiesof 757basispoints(bps).Sincethattime,theyieldontheindexhas declined,to6.19%,andthespreadhasnarrowed,to442bps.Another3%declineinyields, mirroringthereturnsof thelast14months,wouldbedif f icultwiththeindex’syieldsalreadyclose to6.0%,U.S.inf lationcreepinghigher,andtheFedintentongraduallyraisingrates.However,in suchanenvironment,ahighsingle-digitreturnmaybearelativelyattractivealternative. Thecurrentyieldspreadof 425–450bpsisnarrowerthanthe20-yearhigh-yieldindexmedianof 573bps,butthislevelmaynotrepresentextraordinaryovervaluation,normayitimplyanimminent reversiontothemean.Duringpastcreditcyclesin1987,1997–98,andin2005–07,spreadson thehigh-yieldindexnarrowed,tobelow350bps.Thisisnoassurancethatspreadswillcontinueto narrowf romcurrentlevels,butitdoesinviteinvestorstoquestionwhethervaluationsaretoohigh. Investorsmaydemandawiderspread,orhigheryieldf romhigh-yieldinvestments,if thereisan increasedriskof def ault,orpooreconomicconditionsleadingtolowerissuerprof itability,orif betterinvestmentalternativesbecameavailable. Today’sEnvironment Yettoday,theseconsiderationsseemtosupportspreadsnarrowerthantheiraverage,notwider. Forinstance,def aultriskrecentlywasatbelow-averagelevels.J.P.Morgancitesthelong-term def aultrateof theU.S.high-yieldmarketascloseto3.8%,comparedwitha2.8%f orthe12 monthsendedFebruary2017,andtoJ.P.Morgan’sprojectionsof 2.5%f or2017.Further, def aults(asof February2017)wereonly0.70%(excluding,however,theenergyand metals/miningsectors).Theselower-than-averagedef aultratesmaysuggestthattoday’slowerthan-averagespreadsareappropriateandconsistentwithreduceddef aultrisk. Economicgrowthisanotherf actorthattodaymaybef avorablef orthehigh-yieldassetclass. Expectationsf orU.S.growthin2017and2018maybesupportedbyexpansionaryf iscalpolicies, includinginf rastructurespendingandtaxref orm,whichmayimprovecorporateprof itabilityand otherf inancialmetrics.This,inturn,mayreduceriskf ortheassetclass—andtheyieldinvestors demandtoownhigh-yieldbonds. Further,whencomparedtof ixed-incomeinvestmentselsewhere,U.S.high-yieldsecuritieslook relativelyattractive.ComparedwithmanyEuropeanandJapanesealternatives,U.S.highyield of f ersmoreattractiveincomeaswellaslessinterest-rateriskinwhatmaybeanupcomingperiod of graduallyrisingglobalinterestrates. RisingRates Af terconsiderationof def aultrisk,thepotentialimpactof pro-growthf iscalproposalsandthe paucityof otherattractivef ixed-incomealternatives,itisnotsurprisingthatU.S.high-yield securitiesaretradingwheretheyaretoday.Furtheranalysisof theperf ormanceof highyieldin pastrising-rateenvironmentsprovidesyetanotherconsideration,especiallyinanenvironment whereinf lationandmonetarypolicymaywreakhavoconinterest-sensitivef ixed-income categories. Table1identif ieseightperiodsof risingratesoverthelast25yearsandcomparesthe perf ormanceof interest-sensitiveassetclassessuchasthe10-yearU.S.Treasurynoteandthe broadf ixed-incomebenchmarkBloombergBarclaysU.S.AggregateBondIndex(Bloomberg BarclaysAggregate)withhigh-yieldsecuritiesandotherlessrate-sensitiveassetclasses. Table1.Credit-SensitiveBondSectorsSuchHavePerformedWellinPastPeriodsof RisingRates Returns(month-end)duringperiodsofgreaterthana100basis-pointriseinthe10-yearU.S. Treasuryyield 2 Source:Morningstar. 1Citigroup10-YearTreasuryBondIndex. 2 BloombergBarclaysU.S.AggregateBondIndex. 3Bof AMerrillLynchU.S.CorporateBBB-Rated1-3YearIndex. 4 Bof AMerrillLynchHighYieldMasterIIIndex. 5 CreditSuisseLeveragedLoanIndex. 6 Bof AMerrillLynchAllConvertiblesAllQualitiesIndex. 7 S&P500Index. Pastperformanceisnoguaranteeoffutureresults.Perf ormanceduringothertimeperiodsmayhavebeen dif f erentornegative.Otherindexesmaynothaveperf ormedinthesamemannerundersimilarconditions.For illustrativepurposesonlyanddoesnotrepresentanyspecif icportf oliomanagedbyLordAbbettoranyparticular investment.Indexesareunmanaged,donotref lectthedeductionof f eesorexpenses,andarenotavailablef ordirect investment. PortfolioConsiderations Table1illustratesseveralhistoricalrelationshipsthatcouldhelpinvestorsdevelopastrategyf ora rising-rateenvironment.First,includinghigh-yieldbondsmaybeanappropriateportf olioresponse. High-yieldbondshaveprovidedconsistentlypositivereturnsduringtheperiodsof risinginterest rates(depictedinthetable),comparedtogenerallynegativeperf ormancef orlonger-term,highqualityf ixedincomesuchasthe10-yearU.S.TreasuryandtheBloombergBarclaysAggregate BondIndex.Asecondcategorytoconsidermaybef loating-rateloans(essentiallybankloansto high-yieldcompanies)thatalsohaveprovidedpositivereturnsduringrising-rateenvironments,but withaslightlydif f erentriskprof ilethantraditionalhigh-yieldbonds. Anotherconsiderationmaybeamulti-assetportf oliothatincludeshighyieldandseveralof the otherassetclassesthatoutperf ormedduringtheperiodscoveredinTable1.Suchacombination mightof f eramorediversif iedapproachf orsomeinvestors.And,f inally,if aninvestor’sriskprof ile tiltsawayf romtraditionalhighyield,short-termcorporatebondsmayof f eranef f ective alternative. 3 Theinclusionof highyieldmaybeanappropriateportf olioresponsetotheupcomingenvironment, butsuchamoveshouldconsiderinvestorpref erencesaswellasotherexpressionsof riskinthe portf olio.Regardlessof whichstrategyismostappropriatef orindividualinvestors,current valuationof high-yieldsecuritiesmaynotbeexcessivewhenoneconsidersexpecteddef ault rates,projectedeconomicconditions,thelackof attractivef ixed-incomealternatives,andthe historicalperf ormanceof theassetclassduringperiodsof risingrates. 1Allindexreturnandspreaddataaref romJ.P.Morgan. ANoteaboutRisk:Thevalueof investmentsinf ixed-incomesecuritieswillchangeasinterestratesf luctuateandin responsetomarketmovements.Generally,wheninterestratesrise,thepricesof debtsecuritiesf all,andwhen interestratesf all,pricesgenerallyrise.Bondsmayalsobesubjecttoothertypesof risk,suchascall,credit,liquidity, interest-rate,andgeneralmarketrisks.High-yieldsecurities,sometimescalledjunkbonds,carryincreasedrisksof pricevolatility,illiquidity,andthepossibilityof def aultinthetimelypaymentof interestandprincipal.Moreover,the specif iccollateralusedtosecurealoanmaydeclineinvalueorbecomeilliquid,whichwouldadverselyaf f ectthe loan’svalue.Longer-termdebtsecuritiesareusuallymoresensitivetointerest-ratechanges;thelongerthematurity of asecurity,thegreatertheef f ectachangeininterestratesislikelytohaveonitsprice.Lower-ratedbondsmaybe subjecttogreaterriskthanhigher-ratedbonds.Noinvestingstrategycanovercomeallmarketvolatilityorguarantee f utureresults.Statementsconcerningf inancialmarkettrendsarebasedoncurrentmarketconditions,whichwill f luctuate. Forecastsandprojectionsarebasedoncurrentmarketconditionsandaresubjecttochangewithoutnotice. Projectionsshouldnotbeconsideredaguarantee. Thisarticlemaycontainassumptionsthatare“f orward-lookingstatements,”whicharebasedoncertainassumptions of f utureevents.Actualeventsaredif f iculttopredictandmaydif f erf romthoseassumed.Therecanbenoassurance thatf orward-lookingstatementswillmaterializeorthatactualreturnsorresultswillnotbemateriallydif f erentf rom thosedescribedhere. Statementsconcerningf inancialmarkettrendsarebasedoncurrentmarketconditions,whichwillf luctuate.Thereis noguaranteethatmarketswillperf orminasimilarmannerundersimilarconditionsinthef uture. TreasuriesaredebtsecuritiesissuedbytheU.S.governmentandsecuredbyitsf ullf aithandcredit.Incomef rom Treasurysecuritiesisexemptf romstateandlocaltaxes.AlthoughU.S.governmentsecuritiesareguaranteedasto paymentsof interestandprincipal,theirmarketpricesarenotguaranteedandwillf luctuateinresponsetomarket movements. Abasispointisoneone-hundredthof apercentagepoint. Durationisthechangeinthevalueof af ixed-incomesecuritythatwillresultf roma1%changeinmarketinterest rates.Generally,thelargeraportf olio’sduration,thegreatertheinterest-rateriskorrewardf orunderlyingbond prices. Abondyieldistheamountof returnaninvestorwillrealizeonabond.Thoughseveraltypesof bondyieldscanbe calculated,nominalyieldisthemostcommon.Thisiscalculatedbydividingtheamountof interestpaidbythef ace value. TheBofAMerrillLynchU.S.HighYieldMasterIIConstrainedIndextrackstheperf ormanceof USdollar denominatedbelowinvestmentgradecorporatedebtpubliclyissuedintheUSdomesticmarket.Qualif yingsecurities musthaveabelowinvestmentgraderating(basedonanaverageof Moody’s,S&PandFitch),atleast18monthsto 4 f inalmaturityatthetimeof issuance,atleastoneyearremainingtermtof inalmaturityasof therebalancingdate,a f ixedcouponscheduleandaminimumamountoutstandingof $100million. TheBofAMerrillLynchU.S.CorporateBBB-Rated1-3YearIndexisanunmanagedindexcomprisedof U.S.dollar denominatedinvestmentgradecorporatedebtsecuritiespubliclyissuedintheU.S.domesticmarketwithbetweenone andthreeyearremainingtof inalmaturity. TheBofAMerrillLynchAllConvertibles,AllQualitiesIndexcontainsissuesthathaveagreaterthan$50million aggregatemarketvalue.TheissuesareU.S.dollar-denominated,soldintotheU.S.marketandpubliclytradedinthe UnitedStates. TheBloombergBarclaysU.S.AggregateBondIndexrepresentssecuritiesthatareSEC-registered,taxable,and dollardenominated.TheIndexcoverstheU.S.investment-gradef ixed-ratebondmarket,withindexcomponentsf or governmentandcorporatesecurities,mortgagepass-throughsecurities,andasset-backedsecurities.Totalreturn comprisespriceappreciation/depreciationandincomeasapercentageof theoriginalinvestment. TheCitigroup10YearTreasuryBondIndexisabroadmeasureof theperf ormanceof themedium-termU.S. Treasurysecurities. TheCreditSuisseLeveragedLoanIndexisdesignedtomirrortheinvestableuniverseof theU.S.dollardenominatedleveragedloanmarket. TheS&P500 ® Indexiswidelyregardedasthestandardf ormeasuringlargecapU.S.stockmarketperf ormanceand includesarepresentativesampleof leadingcompaniesinleadingindustries. Indexesareunmanaged,donotref lectthedeductionof f eesorexpenses,andarenotavailablef ordirectinvestment. Thecreditqualityof thesecuritiesinaportf olioisassignedbyanationallyrecognizedstatisticalratingorganization (NRSRO)suchasStandard&Poor’s,Moody’s,orFitch,asanindicationof anissuer’screditworthiness.Ratingsrange f rom‘AAA’(highest)to‘D’(lowest).Bondsrated‘BBB’oraboveareconsideredinvestmentgrade.Creditratings‘BB’ andbelowarelower-ratedsecurities.Highyielding,non-investment-gradebondsinvolvehigherrisksthaninvestmentgradebonds.Adverseconditionsmayaf f ecttheissuer’sabilitytopayinterestandprincipalonthesesecurities. Theopinionsintheprecedingcommentaryareasofthedateofpublicationandaresubjecttochange.Additionally,the opinionsmaynotrepresenttheopinionsofthefirmasawhole.Thedocumentisnotintendedforuseasforecast,research orinvestmentadviceconcerninganyparticularinvestmentorthemarketsingeneral,anditisnotintendedtobelegaladvice ortaxadvice.ThisdocumentispreparedbasedoninformationLordAbbettdeemsreliable;however,LordAbbettdoesnot warranttheaccuracyandcompletenessoftheinformation. Investorsshouldcarefullyconsidertheinvestmentobjectives,risks,chargesandexpensesof theLordAbbettFunds.Thisandotherimportantinformationiscontainedinthefund's summaryprospectusand/orprospectus.Toobtainaprospectusorsummaryprospectusonany LordAbbettmutualfund,youcanclickhereorcontactyourinvestmentprofessionalorLord AbbettDistributorLLCat888-522-2388.Readtheprospectuscarefullybeforeyouinvestor sendmoney. NotFDIC-Insured.Maylosevalue.Notguaranteedbyanybank.Copyright©2017Lord,Abbett& Co.LLC.Allrightsreserved.LordAbbettmutualfundsaredistributedbyLordAbbett 5 DistributorLLC.ForU.S.residentsonly. Theinformationprovidedisnotdirectedatanyinvestororcategoryofinvestorsandis providedsolelyasgeneralinformationaboutLordAbbett’sproductsandservicesandto otherwiseprovidegeneralinvestmenteducation.Noneoftheinformationprovidedshouldbe regardedasasuggestiontoengageinorrefrainfromanyinvestment-relatedcourseofaction asneitherLordAbbettnoritsaffiliatesareundertakingtoprovideimpartialinvestmentadvice, actasanimpartialadviser,orgiveadviceinafiduciarycapacity.Ifyouareanindividual retirementinvestor,contactyourfinancialadvisororotherfiduciaryaboutwhetheranygiven investmentidea,strategy,productorservicemaybeappropriateforyourcircumstances. 6